Glossary
American depositary receipt (ADR)
A US-traded certificate that represents shares of a foreign company, letting investors buy it in dollars on a US exchange.
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An American depositary receipt (ADR) is a certificate issued by a US bank that represents a set number of shares in a foreign company held by that bank. ADRs trade in US dollars on US exchanges or over the counter, settle like domestic stocks and pay dividends in dollars, which makes it simple for US investors to own companies based in Japan, Europe, China or elsewhere. Each tradable unit is technically an American depositary share (ADS), though most people say ADR for both.
How it works
A depositary bank buys or receives the company's ordinary shares in their home market, holds them with a local custodian and issues ADRs against them. The ADR ratio says how many ordinary shares one ADR stands for, and it can be more or less than one.
ADRs come in sponsored versions, set up with the company's cooperation, and unsponsored ones created by a bank without it. Sponsored programs are further split into levels: Level I trades over the counter with minimal reporting, while Levels II and III list on an exchange and require fuller SEC filings, with Level III used to raise new capital.
Risks and costs
Owning an ADR still means owning a foreign stock. Its dollar price moves with both the company's home-market price and the exchange rate. Depositary banks charge small custody fees, often a few cents per share a year, usually deducted from dividends. Foreign withholding tax may also apply to dividends. And some companies, notably Chinese ones, list through structures that give ADR holders weaker legal claims than direct shareholders.