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What is American Depositary Share (ADS)?

An American Depositary Share (ADS) is a financial instrument that represents a specified number of shares in a foreign company. ADSs are typically issued by a U.S. depositary bank and traded on U.S. stock exchanges, allowing U.S. investors to easily invest in foreign companies.

Here’s how the ADS process generally works:

1. The foreign company decides to make its shares available to U.S. investors. They enter into an agreement with a U.S. depositary bank.

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

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

4. The ADSs are listed and traded on U.S. stock exchanges, enabling U.S. investors to buy and sell them like any other U.S.-listed security.

ADSs offer several advantages to both the foreign company and U.S. investors:

1. Access to U.S. capital markets: By issuing ADSs, foreign companies can tap into the U.S. capital markets to raise capital and expand their investor base.

2. Increased visibility and liquidity: Listing ADSs on U.S. stock exchanges can enhance a foreign company’s visibility, increase liquidity, and attract a broader range of investors.

3. Familiarity for U.S. investors: ADSs are traded in U.S. dollars on U.S. exchanges, providing convenience and familiarity for U.S. investors who can transact in their local currency and benefit from U.S. market practices and regulations.

4. Diversification opportunities: U.S. investors can easily include shares of foreign companies in their investment portfolios through ADSs, enabling geographic and industry diversification.

It’s important to note that ADSs may have different levels of ADR sponsorship, similar to American Depositary Receipts (ADRs). Sponsored ADSs involve cooperation between the foreign company and the depositary bank, while unsponsored ADSs are created without the direct involvement of the foreign company.

Investors considering investing in ADSs should conduct thorough research on the foreign company, understand the level of ADS sponsorship, evaluate any associated risks, and consider factors such as the company’s financial performance, industry dynamics, and potential currency exchange rate fluctuations.