Legal Definitions - American Depository Receipt

An American Depository Receipt (ADR) is a certificate issued by a U.S. bank that represents a specific number of shares of a foreign company's stock. These certificates allow shares of non-U.S. companies to be traded on U.S. stock exchanges, making it easier for American investors to buy and sell stock in foreign corporations without directly dealing with foreign markets, currencies, or regulatory requirements. Essentially, an ADR acts as a proxy for the underlying foreign shares, simplifying international investment for U.S.-based individuals and institutions.

• Imagine Sarah, an American investor, is impressed by a leading German automotive manufacturer and wants to invest in its growth. Instead of opening a brokerage account in Germany, converting her U.S. dollars to Euros, and navigating German stock market regulations, Sarah can simply purchase an ADR for that German company through her U.S. brokerage account. The ADR is denominated in U.S. dollars and trades on a U.S. exchange, just like shares of an American company.

  This illustrates an ADR because Sarah is able to gain exposure to a foreign company's stock using a familiar U.S. investment vehicle, avoiding the complexities of direct foreign stock ownership.

• A large U.S.-based mutual fund, focused on global technology, wants to include shares of a rapidly growing South Korean semiconductor company in its portfolio. To streamline the investment process and manage compliance within U.S. regulations, the fund manager opts to buy ADRs representing shares of the South Korean company. This allows the fund to diversify its holdings internationally while keeping its trading and settlement processes within the U.S. financial system.

  This illustrates an ADR by showing how institutional investors use these instruments to efficiently integrate foreign equities into their portfolios, simplifying cross-border transactions and regulatory oversight.

• A prominent Japanese consumer electronics company wishes to increase its visibility among U.S. investors and potentially raise capital from the American market without undertaking a full, complex listing on a U.S. stock exchange. The company can work with a U.S. depository bank to establish an ADR program. This allows American investors to easily buy and sell shares of the Japanese company in U.S. dollars on U.S. exchanges, broadening the company's investor base.

  This illustrates an ADR by demonstrating how foreign companies utilize them as a strategic tool to access the vast U.S. capital markets and attract American investors, thereby increasing their global presence and liquidity.