American depository receipt (A.D.R.)

3 key takeaways

• A.D.R.s enable US investors to invest in foreign companies without dealing with foreign stock exchanges.
• They are issued by US banks and represent a specified number of shares in a foreign company.
• A.D.R.s provide US investors with the benefits of trading foreign stocks with the convenience of domestic regulations and currency.

What is an American Depository Receipt (A.D.R.)?

An American Depository Receipt (A.D.R.) is a negotiable certificate issued by a US depository bank that represents a specified number of shares (often one share) in a foreign company’s stock. A.D.R.s are traded on US stock exchanges just like domestic stocks. They offer a way for US investors to invest in foreign companies without the complexities of dealing with foreign stock markets and currencies.

Importance of American Depository Receipts

A.D.R.s are important because they provide a bridge for US investors to gain exposure to international markets, thereby diversifying their investment portfolios. They also help foreign companies access US capital markets, which can provide them with additional liquidity and investor interest. By simplifying the investment process in foreign securities, A.D.R.s make it easier for investors to benefit from global growth opportunities.

How American Depository Receipts work

Issuance: A foreign company enters into an agreement with a US depository bank. The bank purchases shares of the foreign company and issues A.D.R.s in the US market, representing these shares.

Trading: A.D.R.s are listed and traded on US stock exchanges like the New York Stock Exchange (NYSE) or NASDAQ. They can also be traded over-the-counter (OTC).

Dividends and Voting Rights: A.D.R. holders receive dividends in US dollars, which are converted from the foreign currency by the depository bank. They may also have voting rights, similar to direct shareholders, although the exact rights depend on the terms set by the foreign company and the depository agreement.

Examples of American Depository Receipts

• Alibaba Group (BABA): Alibaba, a Chinese e-commerce giant, is traded on the NYSE through A.D.R.s. US investors can buy and sell Alibaba shares without having to trade on the Hong Kong or Shanghai stock exchanges.
• Toyota Motor Corporation (TM): Toyota, a Japanese automaker, trades on the NYSE through A.D.R.s, allowing US investors to invest in one of the world’s largest car manufacturers with ease.
• Nestlé (NSRGY): Nestlé, a Swiss multinational food and beverage company, has its A.D.R.s traded over-the-counter in the US, providing American investors access to its shares.

Real-world application

Consider an investor in the US who wants to invest in a leading European pharmaceutical company but is unfamiliar with European stock exchanges and currency conversions. By purchasing A.D.R.s of this company listed on the NYSE, the investor can easily buy and sell shares using US dollars and follow US trading regulations. The A.D.R. provides a straightforward way to diversify their portfolio with international exposure.

Understanding American Depository Receipts is essential for investors seeking global diversification. A.D.R.s offer a convenient and efficient means of investing in foreign companies while dealing with familiar trading practices and currency.

Related topics you might want to learn about include global investing, foreign direct investment (FDI), and international finance. These areas provide further insights into the mechanisms and benefits of investing across borders.