ADR
An American Depositary Receipt (ADR) is a financial instrument that represents shares in a foreign company and trades on U.S. financial markets. ADRs are issued by U.S. banks and can be traded on U.S. stock exchanges or over-the-counter markets. Each ADR typically represents a specific number of shares in the foreign company. ADRs allow U.S. investors to invest in foreign companies conveniently without having to purchase foreign stocks directly. ADRs provide foreign companies with access to U.S. capital markets while offering U.S. investors a wider range of investment opportunities.
Definition: American Depositary Receipts (ADRs) are financial instruments that represent shares of foreign companies 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 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 first appeared in 1927 when J.P. Morgan Bank issued the first ADR to help Selfridges, a British department store, raise funds in the U.S. market. Since then, ADRs have become an important tool for foreign companies to enter U.S. capital markets.
Categories and Characteristics: ADRs are mainly divided into three categories: Level I, Level II, and Level III ADRs.
- Level I ADRs: These are traded over-the-counter in the U.S. and have lower disclosure requirements, suitable for companies not planning to list on major U.S. stock exchanges.
- Level II ADRs: These are listed on major U.S. stock exchanges (such as NYSE or NASDAQ) and have higher disclosure requirements, suitable for companies seeking more exposure in the U.S. market.
- Level III ADRs: These are listed on major U.S. stock exchanges and involve public offerings to raise capital, with the highest disclosure requirements, suitable for companies aiming to raise significant funds in the U.S. market.
Specific Cases:
- Case 1: Alibaba Group issued Level III ADRs in 2014 to list on the NYSE, becoming one of the largest IPOs globally at the time. Through ADRs, Alibaba attracted significant attention and capital from U.S. investors.
- Case 2: Swiss pharmaceutical company Novartis issued Level II ADRs to list on the NYSE, allowing U.S. investors to easily invest in this European pharmaceutical giant.
Common Questions:
- Question 1: What are the trading fees for ADRs?
Answer: Trading fees for ADRs include transaction commissions, depositary bank fees, and currency conversion fees. Investors should be aware of these fees before trading. - Question 2: How are dividends for ADRs distributed?
Answer: Dividends for ADRs are usually paid in U.S. dollars but are subject to withholding taxes and depositary bank management fees.
