What is an American Depository Receipt?

5 min read | July 17, 2021 03:36 AM AEST | By Kiran Murali

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What is an American Depository Receipt? — Image source: Gsign76,Shutterstock

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Summary

American Depository Receipt, or ADR, represents a specified number of shares of a foreign company's stock.

Foreign companies get access to a larger pool of international investors through ADR to raise funds for their operations and expansion plans.

Some of the popular ADRs trading on the US market include Alibaba Group, JD.Com, Nio Inc. and Taiwan Semiconductor Manufacturing Company.

Depository receipts are used by foreign companies to raise funds by issuing equity in the international capital market. It is a financial security that allows investors to trade shares in a foreign company.

Depositary receipts are of different types globally. An American Depository Receipt, or ADR, is a certificate representing a specific number of shares of a public listed foreign company's stock. The receipts are issued by a depositary bank in the US.

The ADRs trade on stock exchanges in the US, including New York Stock and NASDAQ, just as any directly listed companies do.

There are two types of ADRs. One is the sponsored ADR and the other is the unsponsored ADR.

In the case of sponsored ADR, the foreign company pays the costs of issuing a depository receipt. The company keeps control of the receipts while banks handle the transaction with investors. In addition, sponsored ADRs can be categorized into different levels based on how the foreign company complies with U.S. Securities and Exchange Commission regulations and accounting procedures.

Meanwhile, when it comes to unsponsored ADR, the foreign company is not directly issuing certificates and it does not require permission from the company. Banks can issue several unsponsored ADRs for a single company, unlike the sponsored ADRs, and may offer different dividends.

Source: Pixabay

Most of the sponsored ADRs are registered with the United States Securities and Exchange Commission and they trade on major stock exchanges. Unsponsored depository receipts ADRs are traded only over the counter.

What are the pros and cons of American Depository Receipts?

Foreign companies get exposure to the US market through ADRs. The companies can raise large amounts to fund their operations and business expansions from a larger pool of international investors.

By issuing ADRs, the foreign companies can bypass the processes and expenses involved while directly listing their shares on the stock exchanges in the US.

Investors find depository receipts as the most convenient means to purchase the stocks of those companies, which are based outside their country. They can buy the stocks of the foreign companies just like directly listed stocks.

ADRs trade in the same U.S. market hours. The prices are quoted and dividends are paid in US dollars. Its settlement process is the same as those for domestic shares.

However, though American Depository Receipts are priced in dollars, the investment could be vulnerable to the value of foreign currencies.

Also, the choice for ADRs is limited. Not all major foreign companies have issued their depository receipts.

Here we explore some of the popular ADRs on the US stock market.

Source: Pixabay

Alibaba Group Holding Ltd. (NYSE:BABA)

Alibaba Group is a Chinese technology giant involved in e-commerce and cloud business. Alibaba’s ADR is listed on the NYSE. It has a market capitalization of US$582.24 billion and has 2.71 billion outstanding shares. Alibaba’s stock lost 8 percent this year.

Taiwan Semiconductor Manufacturing Company Ltd. (NYSE:TSM)

Taiwan Semiconductor Manufacturing Company’s ADRs are listed in New York. It has a market cap of US$547 billion and over 5.10 billion outstanding shares. The Taiwan-based company’s stock gained 6 percent year to date.

JD.Com (NASDAQ:JD)

Beijing-based JD.Com is the rival company of Alibaba Group’s Tmall. Its businesses include online retail of electronics, home appliances and general merchandise products. JD’s depository receipts trade on NASDAQ. Its market capitalization totals US$120 billion and has 1.56 billion outstanding shares. JD’s stock lost 14 percent year to date.

NIO Inc. (NYSE:NIO)

This Shanghai-based smart electric vehicle maker trades on the New York Stock Exchange. It has a market capitalization of US$71.57 billion and has 1.64 billion outstanding shares. Nio’s stock declined 12 percent year to date.

Baidu Inc. (NASADAQ: BIDU)

Baidu is a technology and search engine company with headquarter in Beijing. Its depository shares are traded on NASDAQ and have a market capitalization of US$65 billion. Baidu has 353.61 million shares outstanding and its stock is down 16 percent year to date.

Please note: The above constitutes a preliminary view and any interest in stocks/cryptocurrencies should be evaluated further from an investment point of view.

The reference data in this article has been partly sourced from EODHD/Others.

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