Harness Money

What is American Depositary Receipt (ADR)?

An American Depositary Receipt (ADR) is a financial instrument that represents shares of a foreign company traded on a U.S. stock exchange. ADRs enable U.S. investors to invest in foreign companies without having to directly purchase shares on foreign exchanges.

Here’s how the ADR process typically works:

1. The foreign company decides to issue ADRs. They enter into an agreement with a U.S. bank, known as the depositary bank.

2. The depositary bank purchases the shares of the foreign company on the foreign stock exchange.

3. The depositary bank holds these shares and issues ADRs in the U.S. market. Each ADR represents a specific number of underlying shares of the foreign company.

4. The ADRs are then listed and traded on a U.S. stock exchange, allowing U.S. investors to buy and sell them like any other U.S.-listed security.

There are two main types of ADRs:

1. Sponsored ADRs: These are issued with the involvement and cooperation of the foreign company. The company typically assists with administrative tasks, investor relations, and financial reporting requirements.

2. Unsponsored ADRs: These ADRs are created without the direct involvement or cooperation of the foreign company. They are usually initiated by a third party, such as a broker or financial institution, to meet investor demand for shares of a particular foreign company. Unsponsored ADRs may have fewer rights and fewer regulatory requirements compared to sponsored ADRs.

ADRs offer several benefits to investors:

1. Access to foreign markets: ADRs provide a way for U.S. investors to invest in foreign companies without needing to navigate foreign exchanges or currencies.

2. Liquidity: ADRs are traded on U.S. stock exchanges, which typically have higher trading volumes and liquidity compared to some foreign exchanges.

3. Diversification: ADRs allow investors to diversify their portfolios by including shares of foreign companies from various industries and regions.

4. Convenience: Investing in ADRs is often more convenient for U.S. investors, as they can transact in U.S. dollars and benefit from familiar U.S. market practices and regulations.

It’s important to note that ADRs carry their own risks and considerations. Investors should carefully research the underlying foreign company, understand the level of ADR sponsorship, assess currency exchange rate risks, and evaluate any tax implications associated with holding ADRs.