American Depositary Receipt
An American Depositary Receipt is a security traded on a US stock exchange that represents shares of a company based outside the United States. It allows American investors to invest in companies like SAP or Alibaba without having to buy on a foreign exchange.
Anyone living in the United States who wants to buy shares in a German or Chinese company has a practical problem. Those shares are traded in Frankfurt or Hong Kong, in euros or Hong Kong dollars, under foreign rules. An American Depositary Receipt solves that. A large US bank buys the shares in the company’s home country and holds them in a custody account, that is, a safeguarded stock that is not touched. Against this stock, the bank issues new certificates in the US that can be bought there quite normally in dollars. Such a certificate is the American Depositary Receipt, or ADR for short.
What ADRs offer investors and companies
For investors, the main advantage is convenience. An ADR is settled in dollars, follows US trading hours, and sits in the familiar brokerage account. No fees are charged for currency conversion when buying. Dividends, meaning the company’s profit distributions, are also paid out by the bank in dollars.
For the company itself, it’s about money and visibility. The US capital market is the largest in the world. Many American funds are, under their own rules, only allowed to buy securities listed in the US. Without an ADR, these buyers would be out of reach for a German or Taiwanese company. That’s why corporations like SAP, TSMC, or Novo Nordisk use this route.
One common misconception: An ADR is not a copy and not a bet on the price. Real, deposited shares stand behind it. Nevertheless, it is legally a separate security. One holds a claim against the depositary bank, not the share in the company directly.
The path from the home exchange to the US depositary
It starts with a depositary institution, usually a large US bank such as Bank of New York Mellon or Citibank. It commissions a partner in the company’s home country to buy shares there. These shares remain abroad and are locked up. Against this holding, the US bank issues the ADRs.
The exchange ratio matters. One ADR does not have to correspond exactly to one share. It can represent five shares or just a tenth of a share. The ratio is chosen so that the dollar price looks typical for US investors, generally somewhere between 10 and 100 dollars. For a very expensive Japanese stock, one ADR then simply stands for a fraction of a share.
If the ADR price drifts far from the price of the real share, traders step in. They buy where it’s cheaper and sell where it’s more expensive. Banks can also issue new ADRs or cancel existing ones and return the deposited shares. This mechanism keeps both prices close together. Small discrepancies can remain, however, due to exchange rates and custody fees that are deducted annually from the account.
ADRs in stock market news and at tech companies
In financial news, ADRs come up mainly in connection with Asian technology companies. When reports discuss the price of Alibaba, Baidu, or the chipmaker TSMC, they often mean the ADR in New York, not the share in Hong Kong or Taipei. German corporations such as SAP, Siemens, or Deutsche Bank are also tradable in the US this way.
Politically, ADRs have recently been an issue because of Chinese companies. US regulators demand insight into the companies' audit reports. At one point, it was possible that dozens of Chinese ADRs would be delisted. For investors, that would have meant having to exchange their certificates for real Hong Kong shares.
For investors in Germany, ADRs play a lesser role, since there is usually a direct trading venue available here. Still, one should look closely at whether one is buying an ADR or the original share. Custody fees and the handling of taxes on dividends differ. A related instrument, by the way, is the Global Depositary Receipt, which works on the same principle but is traded on several exchanges outside the US.