This section introduces ADRs as well as GDRs. These are shares of companies traded on foreign markets. Both sponsored and unsponsored ADRs are explained together with the 3 levels of ADR listing. Also, advantages and disadvantages of these shares are discussed.
ADRs and GDRs offer benefits of international diversification
What are American Depository Receipts (ADRs)?
American Depositary Receipts (ADRs) are shares of foreign companies that trade in the United States. ADRs are issued so investors don’t have to buy shares directly on foreign exchanges. This way, investors in the U.S. can buy shares of foreign companies straight from their American brokerage accounts.
There are sponsored and unsponsored ADRs. For an ADR to be sponsored, a foreign company needs to make an arrangement with a depositary bank in the United States. On the other hand, unsponsored ADRs are available without such an agreement.
When owning ADRs, shareholders can receive dividends, but generally are not allowed to vote. Also, 1 ADR can represent more or less than one share of a foreign stock.
The 3 Levels of ADRs
There are 3 levels when it comes to issuing ADRs. Level 1 is for foreign companies that don’t qualify to have their shares listed directly on a stock exchange. These shares trade on OTC market and comply with the most basic SEC requirements.
Level 2 is when shares of foreign companies trade on a stock exchange, but these companies can’t issue more shares in the U.S. to raise capital. Also, the compliance rules are more strict. Finally, at Level 3, ADRs are publicly floated on a U.S. stock exchange. Here, the issuer must comply with all SEC regulations.
American Depository Receipts Advantages and Disadvantages
Among the advantages of purchasing ADRs is the access to foreign shares without a need to open foreign brokerage accounts. This makes it easier to trade them and it reduces various risks related to trading and settlement. For companies, the advantage comes from an access to U.S. investors and increased corporate prestige.
There are disadvantages as well. These shares are still subject to foreign political, economic, and legal risks. For issuers, there are compliance requirements, which can be costly.
Overall, ADRs give opportunities to diversify internationally.
Differences between ADRs and GDRs
American Depository Receipts are for foreign companies which seek access to American markets. Global Depository Receipts (GDRs) are shares (in the form of bank certificates) issued by foreign companies to trade in more than a single country. For example, while ADRs trade in the U.S., GDRs trade in Europe and elsewhere.
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