American Depositary Receipt (ADR)
This page refers to a method of listing the stock of a non-U.S. corporation on a U.S. exchange. For the hotel industry metric, see Average Daily Rate.
An American Depository Receipt, or ADR, is a security issued by a U.S. depository bank to domestic buyers as a substitute for direct ownership of stock in foreign companies. An ADR can represent one or more shares, or a fraction of a share, of a non-U.S. company. Individual shares of a foreign corporation represented by an ADR are called American Depositary Shares (ADSs).
An ADR is a convenient way for companies whose stock is listed on a foreign exchange to cross-list their stock in the United States and make their stock available for purchase by U.S. investors, as these receipts can be traded on U.S. exchanges.
Some ADRs are traded on major stock exchanges such as the Nasdaq Stock Market (NDAQ) and the New York Stock Exchange, which require these foreign companies to conform to many of the same reporting and accounting standards as U.S. companies. Other ADRs are traded on over-the-counter exchanges that impose fewer listing requirements.
Stock dividends and similar adjustments to the underlying shares are paid in cash or ADR dividends by the bank.
Depositary Receipts (DRs) were created in 1927, primarily to circumvent the difficulties associated with different currencies in the foreign market. Investors attempting to enter the emerging markets or other foreign stock exchanges have to go through expensive commissions and currency exchange before successfully investing in a foreign market. With ADRs, however, investors can take advantage of foreign markets while trading in U.S stock markets. The bank choosing to issue the ADR controls the number of foreign shares each ADR represents. Each ADR could represent multiple shares of the foreign company, or vice versa.
Since each ADR represents a share or shares of the foreign company, the price of the ADR changes in tandem with the price of the foreign stock. Therefore, any change in price in the foreign company's stock applies to the change in price of the ADR. In this way, investors can benefit from price changes without worrying about currency conversion.
ADRs take into account currency fluctuations and foreign inflation. Should there be rampant inflation in the nation of the foreign company, its ADR would rapidly decrease in real value. Investors do have to worry about inflation and currency changes in the foreign nation despite not having to convert currency to buy foreign shares.