Amercing depository receipt also known as ADR refers to those shares which are issued by the foreign company with the help of bank located in America for investors of America looking to invest in foreign companies. Hence for example suppose company A which is doing business in Europe region and is listed in its own country, now investors in the USA wants to invest in the business of the company than they will hesitate to invest in the company’s local stock market due to country and currency risk but if its ADR is listed then they will happily invest in the company. In order to understand more about this concept, one should look at some of the important features of American depository receipt –
Characteristics of American Depository Receipt
Trade in US Markets
The first and foremost feature of American depository receipt is that they trade in American markets only and not any other stock markets of the world, hence an investor can only buy and sell ADR in US markets only. Hence for example if you are a resident of the USA and have bought ADR of London based company and in few years you shift to London then you cannot sell the ADR of London based company in London rather you have to sell those ADR in the US only.
Pivotal Role of Banks
In case of American depository receipt, the banks of US plays a key role because any company thinking of listing its shares in the form of ADR will have to contact US banks who in turn will buy shares from the company and keep it as security before offering the ADRs to the investors through US stock exchange. In simple words, without the help of US banks, no company can issue American depositary receipts in the American stock markets.
Currency Factor
Currency plays an important part because the return of the investor of ADR are dependent on foreign exchange fluctuations. In simple words when company issues dividend than currency will come into play because US investors will get dividends after factoring exchange rate which may or may not be favorable to the investor.
International Diversification
If US investors want to diversify their portfolio internationally than ADR is a good option because through American depository receipt an investor can easily benefit from the growth of companies that are located in emerging markets where growth rate is more than developed markets like the USA.
Fraction or Multiple Stocks
In the case of ADR, it is not necessary that the American depositary receipt should be on one to one basis rather the underlying shares can be in fraction or multiple shares. Hence for example, if company A issues 100000 stocks to the US bank and US bank in turn issues 50000 ADR than it implies that 1 ADR is equal to 2 stock or if US bank issues 200000 ADR than it implies that 2 ADR is equal to 1 stock of the company.
As one can see from the above the American depository receipt has many unique characteristics and that is the reason why any company looking to attract, as well as win the confidence of investors from America, should go ahead and issue ADR.