An American Depositary Receipt (ADR) is a negotiable security that represents ownership in shares of a non-U.S. company held by a depositary bank in the United States. ADRs are similar to American Depositary Shares (ADSs), but the terms are often used interchangeably.
When a non-U.S. company decides to issue ADRs, it enters into an agreement with a depositary bank, typically a U.S. bank, to hold the shares of the company's stock and issue the ADRs to U.S. investors. Each ADR typically represents a certain number of underlying shares of the foreign company's stock, and the ADRs trade on U.S. stock exchanges just like domestic stocks.
ADRs can be sponsored or unsponsored. A sponsored ADR is issued with the cooperation and involvement of the foreign company, while an unsponsored ADR is issued without the company's involvement.
ADRs can provide several benefits to investors, including easier access to foreign markets, reduced currency risk, and greater liquidity. However, investors should be aware that ADRs may not offer the same protections as domestic stocks and may have different reporting and disclosure requirements.
Overall, ADRs are a way for non-U.S. companies to expand their investor base by making it easier for U.S. investors to invest in their stock, while also providing U.S. investors with greater access to foreign markets.
Types of ADRs: There are three types of ADRs: Level 1, Level 2, and Level 3. Level 1 ADRs are the most basic type, and are only traded on U.S. over-the-counter (OTC) markets. Level 2 ADRs are listed on a U.S. stock exchange and are subject to more stringent reporting requirements. Level 3 ADRs are the most advanced type and allow companies to raise capital by issuing new shares to U.S. investors.
Depositary banks: ADRs are issued by depositary banks, which are typically U.S.-based banks. These banks hold the shares of the foreign company's stock and issue the ADRs to U.S. investors.
Trading on U.S. stock exchanges: ADRs trade on U.S. stock exchanges just like domestic stocks, which makes it easier for U.S. investors to buy and sell shares of foreign companies.
Conversion ratio: Each ADR typically represents a certain number of underlying shares of the foreign company's stock, which is known as the conversion ratio. The conversion ratio can vary depending on the company and the terms of the ADR agreement.
Sponsored vs. unsponsored ADRs: A sponsored ADR is issued with the cooperation and involvement of the foreign company, while an unsponsored ADR is issued without the company's involvement. A sponsored ADR typically provides greater information and reporting about the company to investors.
Voting rights: ADR holders typically have the right to vote on certain matters, such as the election of directors, but the voting rights may be limited or different from the rights of shareholders who hold the underlying shares directly.
Fees: Depositary banks typically charge fees for holding and issuing ADRs, which can include custody fees, transaction fees, and other charges. These fees can vary depending on the bank and the terms of the ADR agreement.
Overall, ADRs provide a way for foreign companies to access U.S. capital markets and for U.S. investors to invest in foreign companies. ADRs can provide benefits such as greater liquidity and lower transaction costs, but investors should be aware of the risks and potential limitations of investing in ADRs, such as different reporting requirements and limited voting rights.