American Depositary Receipts

Definition

American Depositary Receipts (ADRs) are financial instruments that allow U.S. investors to buy shares of foreign companies without dealing with foreign currencies and different regulatory environments. ADRs represent shares in a foreign company and are traded on U.S. exchanges, making it easier for American investors to gain exposure to international markets while simplifying the process of investing in foreign stocks.

5 Must Know Facts For Your Next Test

1. ADRs can be sponsored or unsponsored; sponsored ADRs have the backing of the foreign company, while unsponsored ADRs do not require the company's involvement.
2. The value of an ADR is based on the price of the underlying foreign shares and is adjusted for any currency exchange rates.
3. ADRs make it easier for U.S. investors to diversify their portfolios internationally by investing in foreign companies without the complexities of foreign stock markets.
4. There are different levels of ADRs (Level 1, Level 2, and Level 3), with each level having different regulatory requirements and trading venues.
5. Investors in ADRs may also receive dividends, which are paid in U.S. dollars after being converted from the foreign currency by the depositary bank.

Review Questions

• How do American Depositary Receipts simplify international investing for U.S. investors?
  • American Depositary Receipts simplify international investing by allowing U.S. investors to purchase shares of foreign companies in a familiar currency and regulatory environment. By representing shares in a foreign company while being traded on U.S. exchanges, ADRs eliminate the need for investors to navigate complex foreign stock markets or deal with currency conversions directly. This ease of access encourages diversification into international stocks, broadening investment opportunities.
• What are the main differences between sponsored and unsponsored ADRs, and how do they affect investor choices?
  • Sponsored ADRs are issued with the direct involvement of the foreign company, providing more information and support for investors, while unsponsored ADRs do not have this backing. Sponsored ADRs typically offer better liquidity and may have more stringent reporting requirements, making them more attractive to investors who seek reliable information about their investments. In contrast, unsponsored ADRs might appeal to investors looking for lower costs or access to a wider range of international companies.
• Evaluate the impact of American Depositary Receipts on global capital markets and their role in facilitating cross-border investments.
  • American Depositary Receipts significantly impact global capital markets by bridging the gap between domestic and international investing. They allow U.S. companies to raise capital from a broader investor base while providing American investors access to diverse international opportunities without navigating complex regulatory environments. The existence of ADRs promotes cross-border investments, enhances market efficiency, and increases liquidity for foreign stocks listed in the U.S., ultimately fostering a more interconnected global financial ecosystem.

Related terms

Depositary Bank: A financial institution that issues ADRs and holds the underlying shares of the foreign company, facilitating the trading of these securities on U.S. exchanges.

Global Depositary Receipts: Similar to ADRs, but these are issued outside the U.S. and can be traded in multiple currencies, allowing investors from various countries to invest in foreign companies.

Cross-Listing: The practice of listing a company's shares on more than one stock exchange, allowing access to different investor bases and potentially increasing liquidity.