American Depositary Receipts - Explained
What are American Depositary Receipts?
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Table of ContentsWhat are American Depositary Receipts?How Are American Depository Receipts Used?Academic Research for American Depository Receipt
What are American Depositary Receipts?
The ADR (American Depositary Receipt) Shares are the securities representing the ownership of non-US shares deposited in US banks.
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How Are American Depository Receipts Used?
The ADR Shares let US investors purchase the shares of foreign businesses from their own market in US dollars. In turn, businesses from the non-US countries get a way to enhance their funding by bidding on the American stock market. Like an ordinary shares, ADR Shares bear a proportional percentage of the company's capital stock. Moreover, they grant the same rights to the investors. Among others:
- Share in profits (dividends in US dollars).
- preferential subscription right
- Voting Rights
However, the ADR action may not always be equal to ADS. They may reflect both packages of the shares and their divisions. Moreover, the ADR Shares are listed and traded in US dollars. The same price is used for listing as the translated ADSs per currency. Hence, the figure for the financial arbitration can be provided. In fact, as the American stock market closes afterwards, based on the market we compare with, the original shares closing values are generally taken as reference. The ADR operations can be summarized in the following steps:
- A foreign company enters the US market with its shares.
- An American placement agent makes a contract with the company to guarantee a subscription of the shares (that is called the underwriting contract).
- A US bank (depository) will protect and issue ADRs.
This way, the US investors can get shares of the foreign businesses without being worried for the exchange rate, the language of the market or the fiscal repercussions. However, ADRs are generally linked to different commissions (currency exchange, custody, etc.), hence they are not always the ideal option. Moreover, Flowback can be generated in the ADR Shares (operation that convert the ADR securities into shares to be quoted in the market of origin). Also, Inflow process may take place. From the company's perspective:
- The market where the company is listed is expanding hence the price may become more stable.
- Find new investors more financing.
- Improves the brand image of the company in the United States.
From the investor's perspective:
- It often means a saving of commissions.
- For the American investors, there is no need to examine the language of the market of origin or even its taxation.
- Investor can take advantage of the trading volume of a US stock exchange.
Disadvantages of the ADR Shares
- The exchange rate (currency) risk may arise.
- For the investor, the commissions can be higher in the United States since, among others; also, depository banks imposes an additional commission.
- Based on the company, liquidity problems may also arise.