What are American Depository Receipts?

Trading stocks in the United States would prove time consuming and very difficult for foreign companies, therefore the ADR or American Depository Receipt was created to make the exchange easier and faster.

The US depository bank and represents one or more or a part of the shares of the foreign company issues each ADR. The price of the ADR often is the same price of the foreign stock at the home value of the foreign stock. Therefore, this will be the adjusting for the ratio of the foreign companies shares.

The ADR is an arrangement devised by the American investment community where the primary stock certificate of a foreign security is registered in the name of an American trust company or a US bank and held safe by them.

The trust company or bank then in exchange gives receipts against this stock, and these are traded as ADR's. The system developed because purchasers of foreign securities found that it could take several months and was very difficult to have foreign stock issues registered in their name.

This represents a fantastic way to buy those shares of stock from the foreign company while realizing any dividends and capital gains in US dollars. ADR's do not eliminate the economic risks for the underlying shares.

For example: In another country the exchange would come from euros and would be converted to US dollars, net of conversion expenses and foreign taxes. This is in accordance with the agreement for the deposit. ADR's are listed on the NYSE, AMEX, or NASDAQ.

The depository bank will at that point set the ratio of US ADR's per the home country share. This ration can be anything less than or greater to 1.

For Example: a ratio of 4 to 1 means that the ADR share represents four shares in the foreign company.

The majority of the ADR's shares are ranging in pricing from $10 per share to $100 dollars per share.

If for some reason the shares are work considerably less in the home country, then each ADR will represent several real shares. Foreign entities generally like ADR's because it gives them US exposure. This then allows them to tap into the prosperous North American equity trade.

In return, the foreign company must provide sufficient detailed financial information to the bank that is sponsoring them. When a company establishes an American Depositary Receipt program, it must decide what exactly it wants out of the program . What are they willing to commit to, in order to have it work. For this reason, there are different types of programs that a company can choose.

• Unsponsored shares are ADR's that trade on the over the counter(OTC) market. These shares have no regulatory reporting requirements and are issued in accordance with market demand.


• Level 1 depositary receipt programs are the lowest sponsored shares that can be issued. When a company issues sponsored shares, it has one designated depositary acting as its transfer agent.


• Level 2 depositary receipt programs are more complicated for a foreign company. When a foreign company wants to set up a Level 2 program, it must file a registration statement with the SEC and is under SEC regulation.


• A Level 3 depositary receipt program is the highest level a foreign company can have. Because of this distinction, the company is required to adhere to stricter rules that are similar to those followed by U.S. companies

There are also options for restricted trade and private placement. The main thing is that these all stay within the regulations provided.

ADR's help to reduce administration and duty costs that would otherwise be weighed on each transaction. It opens the doors to bringing in foreign trade and saves individual investors money, by reducing administration costs and avoiding duty on each transaction.

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