American Depositary Receipt
The term American depositary receipt (ADR) refers to a negotiable certificate issued by a U.S. depositary bank representing a specified number of shares—usually one share—of a foreign company's stock. The ADR trades on U.S. stock markets as any domestic shares would.ADRs offer U.S. investors a way to purchase stock in overseas companies that would not otherwise be available. Foreign firms also benefit, as ADRs enable them to attract American investors and capital without the hassle and expense of listing on U.S. stock exchanges.
Definition: American Depositary Receipts (ADRs) are negotiable certificates issued by a U.S. depositary bank representing a specified number of shares—usually one—of a foreign company's stock. ADRs can be traded on U.S. stock markets just like any domestic stock. ADRs provide U.S. investors with a way to purchase shares in foreign companies that would otherwise be unavailable. Foreign companies benefit as well, as ADRs allow them to attract U.S. investors and capital without the hassle and expense of listing on U.S. stock exchanges.
Origin: The concept of ADRs first appeared in 1927 when J.P. Morgan created the first ADR to help U.S. investors purchase shares of the British company Selfridges. Since then, ADRs have evolved into a significant financial instrument, helping global companies access the U.S. capital markets.
Categories and Characteristics: ADRs are mainly divided into three categories: Level I, Level II, and Level III.
- Level I ADRs: Not listed on major U.S. exchanges, traded over-the-counter, with the lowest disclosure requirements.
- Level II ADRs: Listed on major U.S. exchanges, with higher disclosure requirements.
- Level III ADRs: Listed on major U.S. exchanges through a public offering, with the most stringent disclosure and regulatory requirements.
- Convenience: U.S. investors can purchase foreign company shares through local markets.
- Liquidity: ADRs are traded on U.S. markets, providing high liquidity.
- Currency Risk: Investors are exposed to currency fluctuations.
Specific Cases:
- Case 1: Alibaba Group issued Level III ADRs in 2014, listing on the New York Stock Exchange, which became one of the largest IPOs globally at the time. This allowed U.S. investors to easily invest in the Chinese tech giant.
- Case 2: Swiss pharmaceutical company Novartis issued Level II ADRs, listing on the New York Stock Exchange, attracting a significant number of U.S. investors and increasing its global market presence.
Common Questions:
- Question: How are dividends paid on ADRs?
Answer: Dividends on ADRs are usually paid in U.S. dollars, but the actual amount can be affected by currency fluctuations. - Question: What are the risks of investing in ADRs?
Answer: The main risks include currency risk, political risk, and the risk of insufficient information disclosure.
