ADS

Definition

American Depositary Shares (ADS) are a financial instrument that allows non-U.S. companies to issue and trade their shares in the U.S. securities market. ADS represent shares of a foreign company and are issued by a U.S. bank. Each ADS typically represents a certain number of foreign shares. Through ADS, investors can conveniently invest in foreign companies in the U.S. market without directly purchasing foreign stocks. ADS provide foreign companies with a pathway to access U.S. capital markets while offering U.S. investors more investment options.

Origin

The concept of American Depositary Shares originated in 1927 when J.P. Morgan Bank first issued ADS for the British company Selfridges. This innovation enabled foreign companies to raise capital in the U.S. market and provided U.S. investors with opportunities to invest in international companies. With globalization, the use of ADS has become widespread, serving as a crucial tool for multinational companies to enter U.S. capital markets.

Categories and Features

American Depositary Shares are mainly divided into three categories: Level I, Level II, and Level III. Level I ADS are not listed on U.S. stock exchanges and are primarily used to increase a company's visibility in the U.S. Level II ADS are listed on U.S. stock exchanges and must comply with SEC reporting requirements. Level III ADS are listed in the U.S. and also raise capital through an initial public offering (IPO). Key features of ADS include providing access to U.S. capital markets, increasing international visibility, and offering investors diversified investment options.

Case Studies

Alibaba Group went public on the New York Stock Exchange in 2014 by issuing ADS, raising approximately $25 billion, making it one of the largest IPOs globally at the time. This move allowed Alibaba to access a large pool of U.S. investors and significantly enhance its international influence. Another example is Baidu, which listed on NASDAQ in 2005 through ADS, successfully raising funds to support its business expansion in China.

Common Issues

Investors using ADS may encounter issues such as exchange rate risk, different tax treatments, and cost differences compared to directly holding foreign stocks. A common misconception is that ADS are identical to U.S. stocks, but in reality, ADS represent shares of foreign companies and may be affected by different market and economic factors.