American Depositary Receipt (ADR)

Definition: ADRs, or American Depositary Receipts, are paper receipts issued by a financial institution when a customer deposits cash or securities (deposits denominated in United States dollars) into an account at the institution. An ADR is a copy of the document issued by the financial institution which shows the amount of money credited to the customer’s account.

ADRs give investors a way to participate in the participation of the U.S. stock market. Investors use the ADR to access small business loans that they normally cannot obtain through traditional financial institutions. Small companies that issue ADRs lend stock to larger companies and receive a return of rights in the underlying assets.

The primary market for ADRs is in the United States. However, counterparty risk arises from the fact that the demand for ADRs is highly price-sensitive. Consequently, the price of an ADR may change in response to shifts in market conditions. 

American depository receipts (ADRs) are an asset class of the U.S. securities market. They provide investors with an easy, liquid way to own U.S. government securities directly without ever leaving their home country. Unlike traditional bank accounts, which are subject to scrutiny by financial regulators, an ADR allows investors to buy securities without worrying that financial institutions will scrutinize their purchases–including but not limited to securities futures and options on such securities. In addition, an investor may hold an ADR in different financial entities with different tax reporting requirements.

Types of American Depositary Receipt (ADR)

  1. Sponsored ADR

A sponsored ADR is issued by bank on behalf of the foreign company. The bank and the business then enter into a legal arrangement to advance funds from accounts in both companies’ names. Funds may be advanced either directly or through a web-based platform provided by the bank.

  1. Unsponsored ADR

Unsponsored ADR is normally issued by broker-dealers who own common stock in a foreign company, but no party has licensed as a national financial institution. Any government or central bank doesn’t back unsponsored ADRs. Instead, they’re issued by commercial banks that serve as intermediaries between borrowers and financial institutions.

Advantages of sponsored ADRs include lower premiums than uns sponsored ADRs and greater flexibility in the choice of investment vehicles. Disadvantages include limited availability, lower prices than the general market, and the need for travel agent services.

Advantages of ADRs

  • It is easy to track and trade, 
  • It is denominated in dollars, which provides the option of purchasing securities with non-dollar money; available through U.S. brokers;
  • It offers portfolio diversification through the purchase or sale of stocks or mutual funds; 
  • for fixed income investors, the opportunity to acquire securities backed by variable interest rates that may not be available through bank accounts; and
  • It can hold the asset.

Disadvantages

  • There are limited choices available for what you can invest them in 
  • Investors may face double taxation if you invest them in things that are ultimately outside of the United States.
  • Because ADRs are issued by banks rather than invested directly in companies, investors may incur currency conversion (CY) fees when purchasing such certificates.

ADRs were developed to buy shares in companies without giving up U.S. citizenship or having an accounting relationship with a company. Because the U.S. government issues them, they are eligible for the same tax exemptions as regular shares. These unique financing instruments are issued by financial institutions such as banks and brokerages and generally have a maturity date different from regular shares.

ADRs combines two of the world’s most well-understood financial practices – domestic stock buying and foreign share trading – and produces an output that is 50 times more reliable than the equivalent system using bank cheques or coins. From its inception, the American Depositary Receipt has employed the strategies and concepts known as networking systems to facilitate trans-border transactions and facilitate the clearance and settlement of stock brokerage accounts on time and under control.