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What is an American depositary receipt (ADR)?

American depositary receipts (ADRs)

How do you define ADR? An American depositary receipts meaning is a negotiable security instrument that is issued by a US depositary bank and represents a specified number of shares in a foreign company’s stock.

ADRs are the US equivalent of global depository receipts (GDRs).

Where have you heard of American depositary receipts?

As an investor, you have likely heard of the complexities that can arise when trying to invest in overseas capital markets. ADRs provide US investors with the opportunity to invest in foreign companies, while avoiding the complications of having to exchange their US dollars to foreign currencies, to open up a foreign brokerage account, or to make trades at inconvenient times due to different time zones.

What do you need to know about American depositary receipts?

What is the history of American depositary receipts (ADRs)? ADRs were created to give US investors easier access to non-US listed companies. Before the creation of ADRs in the 1920s, trying to invest in companies outside the country was extremely difficult due to the difficulties that arose from trading in different currencies at different prices.

The first ADR was created and launched in 1927, allowing US investors to purchase shares of Selfridges, the luxury British department store. Not only was this of great benefit to investors but it also allowed the company to expand into the global markets. 

How do American depositary receipts (ADRs) work? ADRs are created by a depositary bank when a non-US company, or an investor who owns the underlying non-US security, delivers their shares to the bank in the non-US company’s home country. The bank that holds the underlying security will issue the ADRs to the investor, which can then be traded like any other stock on a US stock exchange or over-the-counter (OTC) market. 

To simplify the process, ADRs (as well as any dividends paid) are denominated in US dollars, meaning that investors do not need to exchange their money to a foreign currency before they can buy foreign shares.

There are two different types of ADRs:

 Types of ADR

The main difference between the two types of ADR is where they can be traded. Unsponsored ADRs can only be traded on OTC markets, whereas all but the lowest level of sponsored ADR can be traded on US stock exchanges. 

Here are some of the most famous examples of ADRs:

  • GlaxoSmithKline (GSK), an industry-leading pharmaceutical and healthcare company based in the UK. While the stock trades on the London Stock Exchange (LSE), its ADRs are also available on the New York Stock Exchange (NYSE). 

  • The German car company Volkswagen (VOW3) traded OTC in the US as a sponsored ADR between 1988 and 2018, under the ticker VLKAY. The day after the sponsored programme ended, JP Morgan created an unsponsored ADR for Volkswagen, which now trades under the ticker VWAGY.

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