An American Depositary Share (ADS) is a negotiable security that represents ownership in shares of a non-U.S. company held by a depositary bank in the United States. ADSs are designed to facilitate investment in foreign companies for U.S. investors, by making it easier to buy and sell shares of foreign companies in U.S. markets.
When a foreign company decides to issue ADSs, 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 ADSs to U.S. investors. Each ADS typically represents a certain number of underlying shares of the foreign company's stock, and the ADSs trade on U.S. stock exchanges just like domestic stocks.
There are two types of ADSs: sponsored and unsponsored. A sponsored ADS is issued with the cooperation and involvement of the foreign company, while an unsponsored ADS is issued without the company's involvement.
Investing in ADSs can provide U.S. investors with a way to invest in foreign companies without having to deal with foreign currency exchange rates or other barriers to investing. However, investors should be aware that ADSs may not offer the same protections as domestic stocks and may have different reporting and disclosure requirements.
Overall, ADSs 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.
Depositary banks: ADSs 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 ADSs to U.S. investors.
Trading on U.S. stock exchanges: ADSs 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 ADS 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 ADS agreement.
Sponsored vs. unsponsored ADSs: A sponsored ADS is issued with the cooperation and involvement of the foreign company, while an unsponsored ADS is issued without the company's involvement. A sponsored ADS typically provides greater information and reporting about the company to investors.
Voting rights: ADS 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 ADSs, which can include custody fees, transaction fees, and other charges. These fees can vary depending on the bank and the terms of the ADS agreement.
Overall, ADSs provide a way for foreign companies to access U.S. capital markets and for U.S. investors to invest in foreign companies. ADSs 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 ADSs, such as different reporting requirements and limited voting rights.
Here are some examples of American Depositary Shares (ADSs):
Alibaba Group Holding Limited (BABA): Alibaba is a Chinese e-commerce company that issued ADSs in 2014. Each ADS represents one ordinary share of the company. Alibaba's ADSs trade on the New York Stock Exchange under the ticker symbol BABA.
Nestle S.A. (NSRGF): Nestle is a Swiss food and beverage company that issued ADSs in 1991. Each ADS represents one-half of one ordinary share of the company. Nestle's ADSs trade on the OTC (over-the-counter) market under the ticker symbol NSRGF.
Toyota Motor Corporation (TM): Toyota is a Japanese automobile manufacturer that issued ADSs in 1999. Each ADS represents two ordinary shares of the company. Toyota's ADSs trade on the New York Stock Exchange under the ticker symbol TM.
Royal Dutch Shell plc (RDS-A): Royal Dutch Shell is a British-Dutch oil and gas company that issued ADSs in 2005. Each ADS represents two ordinary shares of the company, one from the Netherlands and one from the United Kingdom. Royal Dutch Shell's ADSs trade on the New York Stock Exchange under the ticker symbol RDS-A.
Samsung Electronics Co. Ltd. (SSNLF): Samsung is a South Korean technology company that issued unsponsored ADSs in 2013. Each ADS represents one common share of the company. Samsung's unsponsored ADSs trade on the OTC (over-the-counter) market under the ticker symbol SSNLF.
These are just a few examples of foreign companies that have issued ADSs to allow U.S. investors to invest in their stock.
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