American Depositary Receipts (ADRs)

 

American Depositary Receipts (ADRs) are U.S.-traded securities that represent shares in a foreign company. They allow American investors to buy and sell international stocks on U.S. exchanges like the NYSE or NASDAQ, without dealing with foreign markets, currencies, or regulations.

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🌍 Why ADRs Exist

Many investors want exposure to international companies, but buying stocks directly in countries like Japan, Brazil, or Germany can be complicated. ADRs simplify that by:

• Issuing U.S. dollar-denominated receipts backed by actual foreign shares

• Trading on U.S. markets just like domestic stocks

• Paying dividends in USD

They’re managed by a U.S. depositary bank (like BNY Mellon, JPMorgan, or Citi), which holds the actual foreign shares and issues the ADRs in the U.S.

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📄 How ADRs Work

Step	Explanation
A foreign company (e.g. Toyota)	Lists shares on its home exchange (e.g. Tokyo Stock Exchange)
U.S. bank buys those shares	And holds them in custody in the home country
Issues ADRs in U.S.	Representing 1 or more shares (e.g. 1 ADR = 2 local shares)
ADR trades in U.S.	On NYSE, NASDAQ, or OTC, in USD, under a U.S.-style ticker (e.g. TM)

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🧾 Types of ADRs

Type	Details
Sponsored ADR	Issued with direct cooperation of the foreign company; subject to SEC rules
Unsponsored ADR	Issued without the foreign company’s involvement; may trade OTC
Level I	Least regulated, trades OTC, limited reporting
Level II	Trades on U.S. exchanges; must comply with SEC registration and GAAP
Level III	Full SEC compliance; allows capital raising in the U.S.

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🔄 ADR Ratio Example

Some ADRs represent multiple foreign shares:

• ADR Ratio = 1:5
  → 1 ADR = 5 ordinary shares

• This is done to adjust the share price for U.S. investors

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💰 Dividends in ADRs

• Paid in USD, even if company pays in foreign currency

• Bank converts and distributes to ADR holders

• May be subject to foreign withholding taxes

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📊 Pros & Cons of ADRs

✅ Advantages	❌ Drawbacks
Easy access to foreign stocks	Not all companies offer ADRs
Trades like U.S. stocks (USD, familiar exchanges)	Fees (custodial, conversion, etc.) may apply
No foreign brokerage required	Currency and political risk still exist
U.S. financial reporting for Level II/III	May have lower liquidity vs U.S. stocks

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🌐 Popular ADR Examples

Company	Ticker	Country
Alibaba	BABA	China
Nestlé	NSRGY	Switzerland
Toyota	TM	Japan
Royal Dutch Shell	SHEL	UK/Netherlands
Tencent	TCEHY	China (OTC ADR)

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🧠 Summary

ADRs simplify global investing by making foreign companies accessible through U.S. markets, in U.S. dollars, under U.S. rules. They offer diversification, convenience, and transparency—especially useful for retail investors who want global exposure without the hassle of foreign accounts.