If you have ever bought shares of a Japanese automaker or a British drug company through an ordinary U.S. brokerage account, you almost certainly bought an American Depositary Receipt. An ADR is a dollar-denominated security, issued by a U.S. bank, that stands in for shares of a company based outside the United States. It trades and settles like a domestic stock, which is why most foreign companies with a U.S. market presence use one.
The basic idea
A foreign company's ordinary shares live in its home market. They are quoted in yen, pounds, or euros, held in that country's settlement system, and governed by local rules. A U.S. retail investor could buy them directly, but that usually means an international account, currency conversion on every trade, and trading during foreign market hours.
The ADR solves this by putting a bank in the middle. A U.S. depositary bank holds the foreign shares and issues receipts against them in the United States. Each receipt represents a set number of shares, or a fraction of one. The SEC describes the ADR as a negotiable certificate evidencing an ownership interest in American Depositary Shares, which in turn represent the shares on deposit.
The price of an ADR tracks the home-market share price, adjusted for that ratio and for the exchange rate. We cover the math in ADR ratios and pricing.
How ADRs are created and cancelled
Two institutions do the work:
- The custodian, a bank in the company's home country that physically or electronically holds the ordinary shares on behalf of the depositary.
- The depositary, a U.S. bank that issues the ADRs, keeps the register of holders, passes along dividends, and handles corporate actions. The large depositaries include BNY, Citibank, JPMorgan, and Deutsche Bank.
Creation
When U.S. demand rises, a broker buys ordinary shares in the home market and delivers them to the custodian. The custodian confirms receipt, and the depositary issues the matching number of new ADRs in the United States. The broker then sells those ADRs to its U.S. clients.
Cancellation
The process also runs in reverse. A holder, normally through a broker, surrenders ADRs to the depositary. The depositary cancels them and instructs the custodian to release the underlying shares in the home market, where they can be sold or held. Depositaries charge a fee for both issuance and cancellation; see ADR fees.
This two-way door is what keeps the ADR price honest. If the ADR drifts too far from the value of the shares behind it, professional traders can create or cancel ADRs and pocket the difference until the gap closes.
Worked example
Suppose a hypothetical German company's shares trade at €40 in Frankfurt, the euro is worth $1.10, and the depositary's ratio is one ADR to one ordinary share. A share is worth €40 × 1.10 = $44, so the ADR should trade near $44 in New York.
A U.S. broker sees buyers lining up. It buys 10,000 shares in Frankfurt for €400,000, delivers them to the custodian, and receives 10,000 newly issued ADRs. It sells them to clients at about $44 each, roughly $440,000 before fees and spread. The company raised no money; existing shares simply moved into the depositary's vault.
Why companies use ADRs
For the foreign company, an ADR program is a way to reach American investors without listing its ordinary shares directly on a U.S. exchange. The common reasons:
- A broader shareholder base. U.S. retail and institutional investors can buy without special accounts.
- Capital raising. At the highest program level, a company can sell new ADRs to U.S. investors in a registered offering.
- Visibility. A New York listing brings analyst coverage and press attention.
- Acquisition currency. A U.S.-traded security can be used to pay for U.S. acquisitions.
Not every ADR has the company's blessing. Some are set up by a depositary on its own initiative, in response to investor demand. That distinction, sponsored versus unsponsored, matters for fees and information, and we explain it in sponsored vs. unsponsored ADRs.
ADR vs. ADS: is there a difference?
Technically, yes. The ADS is the unit of ownership, the thing that represents a specific number of foreign shares. The ADR is the receipt that evidences how many ADSs you own. Company filings tend to say "ADS" because they are describing the security; brokers, journalists, and most investors say "ADR." In practice they mean the same thing to you, and this site uses ADR except where a document's wording matters.
Dollars, settlement, and where they trade
ADRs are quoted, traded, and settled in U.S. dollars through the U.S. clearing system, the Depository Trust Company. You never touch the foreign currency on a trade. Like other U.S. stock trades, they follow the standard U.S. settlement cycle, which moved to one business day after the trade date (T+1) on May 28, 2024.
The currency has not disappeared, though. The ADR's dollar price moves with both the stock and the exchange rate, and dividends are declared in local currency and converted by the depositary. See ADR dividends and currency and currency risk.
Exchange-listed vs. over-the-counter
ADRs trade in two very different places:
- National exchanges (NYSE, Nasdaq). Only sponsored programs that register with the SEC and file annual reports on Form 20-F can list. These ADRs usually have tighter spreads and more disclosure. Toyota's ADR, for example, trades on the NYSE under TM.
- The over-the-counter market. Lower-level sponsored programs and all unsponsored programs trade OTC. Many have five-letter tickers ending in "Y." Liquidity and disclosure vary widely; see OTC foreign stocks.
The program's "level" determines where it can trade and what the company must file. That is the subject of ADR levels explained.
Key point
An ADR is a convenience wrapper. You get the company's economics in dollars, on U.S. hours, in your normal account. In exchange you accept a bank in the middle, a small annual fee, and currency conversion done on the depositary's terms.
What an ADR does not change
The wrapper does not change the company. Its accounting standards, home-country regulation, political environment, and tax regime all come along for the ride. Dividends are usually subject to the home country's withholding tax before they reach you, which is why so many ADR holders end up reading about the foreign tax credit. If you are weighing an ADR against a fund, our comparison of ADRs and international ETFs is a good next stop.
Common questions
Is an ADR the same as owning the foreign company's stock?
Economically it is close, because each ADR represents a fixed number of the company's ordinary shares held by a depositary bank. Legally you own a receipt issued by that bank, and the bank holds the underlying shares through a custodian in the home market.
What is the difference between an ADR and an ADS?
The American Depositary Share is the unit that represents the foreign shares on deposit. The ADR is the certificate or record that evidences ownership of ADSs. In everyday use, including at most brokers, the two terms are used interchangeably.
Can I turn my ADRs into the underlying shares?
Usually yes. A holder can surrender ADRs to the depositary and receive the ordinary shares in the home market, although this normally runs through a broker and involves cancellation fees and a brokerage account that can hold the foreign shares.
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.