ADR

Definition

An American Depositary Receipt (ADR) is a financial instrument that represents shares of a foreign company traded on U.S. markets. ADRs are issued by U.S. banks and traded on U.S. stock exchanges or over-the-counter markets. Each ADR typically represents a certain number of foreign shares. ADRs allow U.S. investors to easily invest in foreign companies without directly purchasing foreign stocks. They provide foreign companies with access to U.S. capital markets and offer U.S. investors more investment options.

Origin

The concept of ADRs originated in 1927 when J.P. Morgan Bank first issued ADRs for the British company Selfridges, enabling U.S. investors to invest more easily in the company. This innovation facilitated foreign companies' entry into U.S. capital markets and gradually developed into a common financial instrument.

Categories and Features

ADRs can be categorized into three levels: Level I, Level II, and Level III. Level I ADRs are typically traded over-the-counter with lower disclosure requirements; Level II ADRs are listed on U.S. stock exchanges and must comply with stricter SEC requirements; Level III ADRs involve new share issuance, allowing foreign companies to raise capital through ADRs. Key features of ADRs include simplified tax treatment and being denominated in U.S. dollars, making them convenient for U.S. investors.

Case Studies

A typical case is Alibaba Group's listing on the New York Stock Exchange in 2014 through ADR issuance, which became one of the largest IPOs globally at the time. Another example is the Swiss pharmaceutical company Novartis, whose ADRs are widely traded in the U.S. market, providing U.S. investors with opportunities to invest in the company.

Common Issues

Investors using ADRs may encounter issues such as exchange rate risk and tax complexity. Additionally, some ADRs may have lower liquidity, leading to wider bid-ask spreads. Investors should carefully research related fees and tax implications.