What is an ADR?

By Henry Jennings

An American Depositary Receipt (ADR) is a financial instrument that allows U.S. investors to invest in foreign companies without dealing with the complexities of international trading. ADRs are issued by U.S. banks and represent shares of a foreign company that the bank holds in its home market. Here are some key points about ADRs:

Issuance: ADRs are created when a foreign company’s shares are purchased and deposited with a U.S. bank. The bank then issues ADRs, which can be traded on U.S. exchanges like regular stocks.

Types: There are several levels of ADRs:

• Level I: Traded over-the-counter (OTC) and not listed on U.S. exchanges. They have the least regulatory requirements.
• Level II: Listed on U.S. exchanges and require more disclosure and regulatory compliance.
• Level III: Similar to Level II but also allow the foreign company to raise capital in the U.S. through public offerings.

Benefits:

• For investors: ADRs provide an easy way to invest in foreign companies, with dividends paid in U.S. dollars, and transactions conducted in U.S. time zones.
• For foreign companies: ADRs offer access to U.S. capital markets, increasing visibility and potentially enhancing their investor base.
• Dividends and Taxes: Dividends on ADRs are paid in U.S. dollars and are subject to U.S. tax regulations. However, investors may also be subject to foreign taxes on dividends, which could sometimes be credited against U.S. taxes.

Risks:

• Investing in ADRs involves currency risk, political and economic risks of the foreign country, and differences in accounting standards and regulations between the foreign country and the U.S.

Overall, ADRs are a convenient way for U.S. investors to gain exposure to international companies while enjoying the benefits of trading within the U.S. financial system.

So next time we talk about what the ADEs are doing in the US, you will know all about them. It is possible to buy an ADR and spilt it back into Australian shares but not for the feint of heart.