American Depositary Receipt (ADR)

ADR is an acronym for American Depository Receipts, which refers to instruments issued by a US Depository bank. These instruments are essentially stocks of foreign companies that are tradable in US stock markets. ADRs are issued in USD ($).Investors in the US who want to invest in companies based in other countries can do so directly through ADRs. ADRs act as a tool for companies to attract investment from the US. ADRs can be sold by US based institutions, like an overseas bank branch and are also traded in the NYSE (New York Stock Exchange) or NASDAQ.

Types of ADRs

ADRs that are sold in the US market are categorized into two types, which are:

1. Sponsored ADR: The overseas company looking to issue shares to the public enters into an agreement with a US Depository bank for selling shares in the US capital market. This US depository bank will be responsible for sale & distribution of shares to the public. These come under the purview of the US Securities and Exchange Commission (SEC)

2. Non-sponsored ADR: Non-sponsored ADR is created by brokers and dealers without involving the foreign company. These are sold over the counter (OTC) and do not require registration with the SEC.

What are the advantages of ADR

Some of the key advantages of ADR are:

a. It is the easiest way for investing in the US Market for foreign investors
b. US based investors can invest in a foreign company through ADR and enjoy international exposure in their portfolio
c. ADRs offer foreign investors a chance to profit from fast growing foreign companies.
d. Foreign companies get an opportunity to generate more capital, greater visibility and enhanced brand value by participating in US stock exchanges.

What are the disadvantages of ADR

Some of the disadvantages to note are:

a. ADRs are issued by very few companies, thus investors do not have a wide range of choice for overseas investment
b. ADRs are affected due to exchange rate volatility