ADR (American Depository Receipt)
ADR (American Depository Receipt) is a form of international stock trading when a certificate (security) that might be traded in some US stock exchange in US dollars and represents shares of foreign company. The main difference of ADR from GDR (Global Depository Receipt) is that shares of the foreign company are held at American Depository (some American bank) and most of the times ADRs are listed in American stock exchanges (or may be traded in OTC market).
ADR’s make investing in foreign stocks easier for American (if ADRs are listed in US, which is not necessary) investors. If American investor would acquire foreign stocks in foreign stock exchange directly, it would create additional problems: taxation, currency exchange costs, trust in intermediaries and other, while investing in ADRs is similar than in local stocks (currency risk remains).
Not all foreign companies have depositary receipts, but only the biggest ones, mostly from emerging markets. Usually one depository receipt represents several shares (ratio is determined in the name of ADR). Still there might be some spread in price of depository receipt and stock price in its original stock exchange, but most of the times it isn’t very significant compared to currency transactions and other costs.
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