An ADR rarely represents exactly one share. One ADR might stand for two ordinary shares, ten shares, or half a share, depending on what the depositary chose when it set up the program. That number, the ADR ratio, is the key to translating an ADR's dollar price into the company's home-market price and back. Once you have it, checking whether your ADR is fairly priced takes simple arithmetic.
What the ratio means
The ratio states how many ordinary shares sit behind each ADR. It is usually written as "ADR : ordinary shares." Common forms look like this:
- 1 : 1 — each ADR represents one share.
- 1 : 10 — each ADR represents ten shares.
- 2 : 1 — two ADRs together represent one share, so each ADR is half a share.
The SEC notes that depositaries pick ratios to put the ADR's price in a range familiar to U.S. investors. A company whose shares trade for the equivalent of $2 at home might use 1 : 20 to produce a $40 ADR. One whose shares cost the equivalent of $400 might use 4 : 1 to produce a $100 ADR.
Find the ratio on the depositary bank's program page, the company's investor relations site, or the deposit agreement attached to the ADR's Form F-6. Brokers sometimes show it in the security details, but do not rely on that alone.
Converting an ADR price to the home-market price
The formula is:
Implied home price = ADR price ÷ shares per ADR ÷ exchange rate (USD per one unit of local currency)
The trick is getting the exchange rate the right way around. Quote it as "dollars per one unit of the foreign currency." If a currency is usually quoted the other way, as the yen is (yen per dollar), invert it first.
Worked example: a 1 : 10 ADR in pounds
A hypothetical British company's ADR trades at $62.50. Each ADR represents 10 ordinary shares. The pound is worth $1.25.
Per share in dollars: $62.50 ÷ 10 = $6.25. In pounds: $6.25 ÷ 1.25 = £5.00.
If the shares are trading at £5.00 in London, the ADR is in line.
Converting a home-market price to the ADR price
Run it backward:
Implied ADR price = home price × shares per ADR × exchange rate (USD per one unit of local currency)
Worked example: a fractional ADR in yen
A hypothetical Japanese company's shares trade at ¥3,000 in Tokyo. The depositary uses a 2 : 1 ratio, so each ADR is half a share (0.5 shares per ADR). The dollar is quoted at ¥150, so one yen is worth 1 ÷ 150 = $0.006667.
Implied ADR price: ¥3,000 × 0.5 × $0.006667 = $10.00.
If that ADR is offered at $10.40, it is about 4% above parity. Before reading anything into the gap, check whether Tokyo is closed and the price is stale.
Skip the arithmetic with the ADR Price Converter: enter the ratio, the exchange rate, and either price.
Why arbitrage keeps the prices aligned
An ADR is a claim on real shares sitting with a custodian (the setup is described in what is an ADR), and new ADRs can be created or cancelled on demand. That keeps the two prices close.
- If the ADR trades rich (above parity), a broker can buy ordinary shares at home, deliver them to the custodian, have the depositary issue new ADRs, and sell those ADRs in New York at the higher price.
- If the ADR trades cheap, a broker can buy ADRs, cancel them with the depositary, receive the ordinary shares, and sell them at home.
Each trade pushes the prices back together. The gap that survives reflects the costs of doing it: depositary issuance and cancellation fees, spreads, currency conversion, and in some countries a stamp tax or similar charge on creating ADRs.
When gaps can persist
- Non-overlapping hours. When the home exchange is closed, the ADR trades on news and on the currency, effectively discovering the next day's price. A gap against yesterday's close is not mispricing. See global market hours.
- Capital controls or foreign ownership limits. If foreigners cannot freely buy the local shares, or the depositary's books are closed to new deposits, creation stops and the ADR can hold a premium.
- Thin OTC programs. Low-volume ADRs can show wide spreads and stale last-trade prices. Use the bid and ask, not the last trade.
How currency moves show up in the ADR price
Because the formula includes the exchange rate, the ADR's dollar price can move even when the home price does not. In the British example, if the pound fell from $1.25 to $1.20 while the shares stayed at £5.00, the implied ADR price would drop from $62.50 to $60.00, a 4% loss to a dollar-based holder. That exposure is the same as owning the shares directly; the ADR only changes the currency you trade in. Our article on currency risk goes further.
Ratio changes
Depositaries change ratios from time to time, often after a stock split or consolidation in the home market, or to move a drifting ADR price back into a normal range. The effect on you resembles a split or reverse split:
- If the ratio moves from 1 : 5 to 1 : 10, each ADR now represents twice as many shares. You end up with half as many ADRs, and the price per ADR roughly doubles.
- If the ratio moves from 1 : 10 to 1 : 5, you receive additional ADRs and the price per ADR roughly halves.
Your total claim on the underlying shares does not change. Fractional ADRs left over are generally sold by the depositary and paid out in cash, which can be a small taxable event. Keep the announcement: you will want it when you reconcile your cost basis, and ratio changes can affect how per-ADR fees add up, since those fees are charged per ADR rather than per dollar. See ADR fees.
Watch out
Old data is the most common source of error. A ratio you found in a five-year-old article may have changed since. Always confirm the current ratio on the depositary's program page before doing a price comparison.
Common questions
Does a higher ADR price mean the ADR is more expensive than the shares?
Not by itself. The ADR price reflects the number of ordinary shares it represents. You need to divide by the ratio and convert currency before comparing it with the home-market price.
Why does the ADR not match the home price exactly?
Small gaps come from bid-ask spreads, the exchange rate you use, trading hours that do not overlap, fees, and local taxes on creating ADRs. Larger gaps usually close quickly because traders can create or cancel ADRs to profit from them, unless something blocks conversion.
Does a ratio change affect what my position is worth?
On its own, no. The depositary adjusts the number of ADRs you hold so that your claim on the underlying shares stays the same. The per-ADR price adjusts in the opposite direction, much like a stock split.
Sources
Educational content only, not investment, tax or legal advice. The Stateside Report does not recommend buying or selling any security. Tax rules depend on your situation; confirm with a qualified tax professional. Full disclosures.