American depositary receipts are financial instruments representing the value of a foreign company’s shares of stock that trade on an American stock exchange.
American depositary receipts are issued by U.S. depository banks and deposited with a custodian or agent of the depository bank in the country of issuance. An ADR represents the right of an investor to obtain the non-U.S. shares held by the bank. Practically, the investors never receive the shares.
ADRs are priced in U.S. dollars and pay dividends in US dollars. However, while convenient for investors, it results in currency risk embedded in the security. Individual shares of a non-U.S. company represented by an American Depository Receipt are called American Depositary Shares (ADSs).
a. depositing them with a bank in exchange for a new ADR or
b. swapping the shares for existing ADRs.
Investment banks are actively helping non-U.S. companies list their shares in the United States through ADRs. Foreign companies utilise the American Depositary Receipt program to raise capital, increase liquidity, and expand U.S. market awareness. Sometimes issuers also use ADRs as an acquisition currency.
An ADR that trades in the U.S. market is priced based on the non-U.S. company’s shares price in their home market. This price is regularly adjusted for the varying forex spot rates. Hence, there is a high degree of volatility in ADR prices. ADR prices are also affected by the home country’s accounting, legal and political differences.
Although most non-U.S. When companies provide GAAP-based financial information, caution is required because of the use of estimates, uncertain tax implications, and other unique adjustments to the home country. ADRs are registered with the S.E.C. through Form-6 based on certain exemptions available to qualified non-U.S. companies.
Also Read: What is a Hedge Fund – Meaning and Purpose
What are the benefits of investing in ADRs?
American depositary receipts allow investors to diversify their portfolios and earn returns from foreign companies. They also offer investors the opportunity to invest in companies that might be otherwise inaccessible.
Another benefit of ADRs is that they trade in real time on major U.S. stock exchanges, which makes them more liquid than foreign stocks. And, because they are denominated in U.S. dollars, investors don’t have to worry about currency risk.
So, if you’re looking for a way to invest in foreign companies without all the hassle, ADRs might be the way to go.