An ADR is a receipt that has a number of foreign shares remaining on deposit with the U.S. depository’s custodian in the issuer’s home market. The bank is a transfer agent for the ADRs that are traded in the United States exchanges or in the OTC market.
ADRs offer various investment advantages. These advantages include −
● ADRs are denominated in dollars, trade on a US stock exchange, and can be purchased through the investor’s regular broker. This is easier than purchasing and trading in US stocks by entering the US exchanges.
● Dividends received on the shares are issued in dollars by the custodian and paid to the ADR investor, and a currency conversion is not required.
● ADR trades clear in three business days as do U.S. equities, whereas settlement of underlying stocks vary in other countries.
● ADR price quotes are in U.S. dollars.
● ADRs are registered securities and they offer protection of ownership rights. Most other underlying stocks are bearer securities.
● An ADR can be sold by trading the ADR to another investor in the US stock market, and shares can also be sold in the local stock market.
● ADRs frequently represent a set of underlying shares. This allows the ADR to trade in a price range meant for US investors.
● ADR owners can provide instructions to the depository bank to vote the rights.
There are two types of ADRs: sponsored and unsponsored.
● Sponsored ADRs are created by a bank after a request of the foreign company. The sponsoring bank offers lots of services, including investment information and the annual report translation. Sponsored ADRs are listed on the US stock markets. New ADR issues must be sponsored.
● Unsponsored ADRs are generally created on request of US investment banking firms without any direct participation of the foreign issuing firm.