What is ADR?
ADR stands for American Depository Receipts, which are a type of negotiable instrument that are basically stocks of foreign companies which are traded in US stock markets.
American Depository Receipts (ADR) are issued by a US Depository bank and offer investors in the US to invest in foreign companies. ADRs are traded on the US Stock exchange and are a great option for foreign companies to attract investors from the US.
ADRs are traded in New York Stock Exchange (NYSE) or NASDAQ, but can also be sold over the counter. ADRs are priced in US Dollars.
Types of ADRs
ADRs that are sold in the US market are categorized into two types, which are:
- Sponsored ADR
- Non-sponsored ADR
Sponsored ADR: In sponsored ADR, the foreign company that is looking to issue shares to the public gets into an agreement with a US Depository bank for the purpose of selling shares in the US capital market.
The US depository bank carries the responsibility of sale, distribution of shares to the public and also maintains record-keeping, dividend distribution. ADRs that are sponsored are listed in US stock exchanges.
US stock exchanges are regulated by the SEC (Securities and Exchange Commission) which acts as a watchdog for all the necessary compliances that should be maintained while trading in US stock exchanges and instruments.
Non-sponsored ADR: Non-sponsored ADR is created by brokers and dealers without the involvement of the foreign company. These types of ADRs are sold over the counter and do not require any registration with the SEC (Securities and Exchange Commission).
Termination of ADR
ADR can be terminated by the foreign company or the depository bank which created the instrument. The termination of ADR results in delisting and cancellation of the ADRs that were issued from US stock markets.
Advantages of ADR
ADR offers the following advantages:
- An American investor can invest in any foreign company which increases the possibility of generating higher returns.
- Foreign companies can get registered in the US Stock exchange and earn more profit and capital.
- Companies can benefit from currency fluctuations.
- ADRs offer an easy option to invest in the US Market
- Pricing of ADRs in the US capital market is cheaper and hence, is an attractive option for the investors.
Disadvantages of ADR
ADR has the following disadvantages:
- Investors need to wait for a long time to generate good returns on ADR.
- It presents a risk of foreign exchange fluctuations
- A limited number of companies register via ADR, hence investors have fewer choices for investment.
This was all about the topic of American Depository Receipts or ADR, which is an important concept in Business Studies for Commerce students. For more such concepts, stay tuned to BYJU’S.