American Depositary Receipts
American Depositary Receipts (ADR) is a form of security representing foreign company stocks traded on the U.S. securities market. ADRs can be used by investors to trade foreign company stocks in the U.S. and also allow foreign companies to raise funds and increase their visibility in the U.S. market more conveniently.
Definition: American Depositary Receipts (ADRs) are a form of security that allows foreign company stocks to be traded on U.S. stock markets. ADRs enable investors in the U.S. to trade foreign company stocks, while also allowing foreign companies to raise capital and increase their visibility in the U.S. market more conveniently.
Origin: The concept of ADRs first appeared in 1927, introduced by J.P. Morgan. The initial purpose was to help American investors more easily invest in the shares of the British company Selfridges. With the development of globalization, ADRs have gradually become an important tool for foreign companies to enter the U.S. capital market.
Categories and Characteristics: ADRs are mainly divided into three categories: Level I, Level II, and Level III ADRs.
- Level I ADRs: Not listed on major U.S. stock exchanges, only traded on over-the-counter (OTC) markets, with lower disclosure requirements.
- Level II ADRs: Listed on major U.S. stock exchanges (such as NYSE or NASDAQ), with higher disclosure requirements.
- Level III ADRs: Not only listed on major U.S. stock exchanges but also able to raise capital in the U.S. market through new stock issuance, with the highest disclosure requirements.
Specific Cases:
- Case 1: Alibaba Group issued ADRs to list on the New York Stock Exchange in 2014, becoming one of the largest IPOs in the world at that time. This allowed U.S. investors to easily invest in this Chinese tech giant.
- Case 2: Swiss pharmaceutical company Novartis trades in the U.S. market through ADRs, enabling it to better access U.S. investors and raise funds in the U.S. market.
Common Questions:
- Question 1: Do I need to pay additional fees to invest in ADRs?
Answer: Yes, investing in ADRs may require paying management fees to the depositary bank, which are usually deducted from dividends. - Question 2: Are ADR dividends subject to double taxation?
Answer: They might be. Dividends are first taxed in the company's home country and then again in the U.S. However, tax treaties between the U.S. and many countries can help alleviate the burden of double taxation.
