What Are American Depositary Receipts?

• ADRs are bought and sold through U.S. brokerages, and settlement occurs through U.S. clearing systems.
• ADRs are traded in dollars and during standard U.S. trading hours on U.S. markets, thus behaving similarly to U.S. stocks.
• ADRs can be classified into two categories: sponsored and unsponsored.

American Depositary Receipts (ADRs) are securities that represent and track shares of a foreign firm and allow Americans to purchase the shares without trading on foreign exchanges. One ADR equals ownership of one share, multiple shares, or a fraction of a share in a non-U.S. company.

ADRs are traded in dollars and during standard U.S. trading hours on U.S. markets, thus behaving similarly to U.S. stocks.

ADR Issuance And Trading Process

The ADRs are issued when U.S. depositary banks purchase shares of a non-U.S. firm in that firm's home country. They keep these stocks in a custodial account in the country of origin and allow ADRs to be created in America. The ADR is linked to a predefined ratio of ADRs to the underlying shares. The ADR pricing generally reflects the value of the underlying shares, adjusted for currency exchange rates.

ADRs are bought and sold through U.S. brokerages, and settlement occurs through U.S. clearing systems. In this way, U.S. investors are kept out of foreign settlement systems and do not have to hold foreign currencies.

Why Investors And Firms Employ ADRs?

ADRs make it easier for U.S. investors to access global markets. Rather than setting up stock accounts abroad or working under different rules, investors can invest in foreign companies through ADRs, which are functionally equivalent to U.S. stocks.

Some firms use ADRs to raise capital in America, while others use them to achieve liquidity and secure stock listings.

Types And Levels Of ADR Programs

ADRs can be classified into two categories: sponsored and unsponsored. In sponsored ADRs, a formal agreement is signed between the foreign company and the depositary bank. Sponsored ADR programs enable investors to access information and dividends more effectively than unsponsored ADR programs.

Unsponsored ADRs do not require a direct contract with a non-U.S. firm. Broker-dealers or depositary banks issue unsponsored ADRs to meet demand. Unsponsored ADRs may provide less reliable information and fewer shareholder benefits.

ADRs are also operating at various levels of programs. Level I ADRs mainly trade over-the-counter. They have fewer requirements for reporting. Level II ADRs trade on major U.S. exchanges. They have higher standards for reporting. Level III ADRs enable companies to raise money in the U.S. using public offerings. They have the highest standards of reporting. All three levels are only applicable to sponsored ADRs.

Cost And Risk Considerations For Investors

ADRs involve additional expenses. The depositary banks charge service or custody fees for administering an ADR facility, paying dividends, and performing other functions. Banks usually subtract these charges from dividends.

Investors are also at risk concerning international markets. Exchange rates, political, and economic changes in the country from which the company hails can influence gains. Regulations governing international companies may also differ from those in the U.S., resulting in investors receiving information less frequently or less comprehensively. Therefore, an investor is advised to examine an ADR’s structure, costs, and reporting requirements before investing.

Also See: Rheinmetall Reloaded: Europe’s Defense Boom Turns Into A Historic Stock Run

For updates and corrections, email newsroom[at]stocktwits[dot]com.

Share

·

Add us on