Definition: American Depositary Shares (ADS) are non-U.S. company equity shares that may be purchased by domestic investors holding ADSs through a direct or indirect investment vehicle such as funds that are registered with the SEC or a broker-dealer registered with the CFTC. ADSs can be purchased for either cash or through a negotiated transaction where the investor agrees to buy an amount of ADSs equal to the investor’s net worth (as established by analyzing financial statements submitted by the company) and then agrees to hold the ADS for a specified period.
American Depositary Shares (ADSs) are the most liquid type of stock available in the United States and are purchased by investors worldwide who purchase them through broker-dealers and financial institutions. They are purchased either whole or in a fractional amount, so investors will have the option to invest in multiple shares at once.
An ADS may represent a significant investment for U.S. investors in a small foreign company. Because ADSs are non-U.S., they generally have lower offering rates than U.S. equities, capitalization, and earnings. However, investors may receive preferential treatment under U.S. tax law and international tax laws governing cross-border investment.
The goal of ADSs is to increase the liquidity of the share market by making it easier for investors to purchase and sell shares. This improves overall demand for the shares, resulting in higher prices and potentially higher profits for investors. In this way, the ADS changes the role of intermediaries in the market from a liquidity provider to a retailer of securities.
Advantages of American Depositary Share
- The primary advantage of American depositary shares is the absence of currency exchange controls and the ability to invest in foreign companies without waiting for weeks or even months for regular (i.e., non-morning-after) transfers from your bank account to translate into shares of the foreign company you want to buy.
- ADSs have become increasingly popular due to their broader investment opportunities and low-cost management interfaces.
- they are purchased directly by the Federal Reserve; there is no need for a passing or brokerage charge
Disadvantages of American Depositary Share
- It involves dealing in cash rather than securities, and this may not be attractive to some investors.
- Second, it may involve cash payments that are often subject to price risk since the market can move sharply in either direction at any given time.
- ADSs also have a limited shelf life and are subject to change restrictions and rules.
- There is also the potential for losses on bad investments made by inexperienced investors; however, this risk is generally small compared with the income generated by owning ADSs and should be considered acceptable in most circumstances.
The ADS market may seem simple and straightforward, but there are many factors to consider. The ADS market operates on the principle of wide supply and tight demand. This allows at least some investors to profit even if their shares are sold short. However, there is a risk that investors may overreact and lock in too much at the drop of a hat. This would reduce the overall value of ADSs and increase the chance of price increases and panics — bank runs in reverse.