American Depositary Receipts

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The stocks of most foreign companies that trade in the U.S. markets are traded as American Depositary Receipts (ADRs). U.S. depositary banks issue these stocks. Each ADR represents one or more shares of foreign stock or a fraction of a share. Those who own ADRs have the right to obtain the foreign stock those ADRs represent, but U.S. investors usually find it more convenient to own the ADR. The price of an ADR corresponds to the price of the foreign stock in its home market, adjusted to the ratio of the ADRs to foreign company shares.[1]

ADRs were introduced in response to the difficulty of buying shares from other countries which trade at different prices and currency values. U.S. banks purchase a large lot of shares from a foreign company, bundle the shares into groups and reissue them on either the NYSE, AMEX or Nasdaq. The depositary bank sets the ratio of U.S. ADRs per home country share. This ratio can be anything less than or greater than 1. For example, a ratio of 4:1 means that one ADR share represents four shares in the foreign company.[2]


References

  1. American Depositary Receipts "American Depositary Receipts ”. www.sec.gov.
  2. 20 Investments: American Depository Receipts. Investopedia.