American depositary receipt (ADR)
Also known as: ADR, american depositary receipts
An American depositary receipt (ADR) is a certificate issued by a U.S. bank that represents shares of a foreign company, allowing the stock to trade on U.S. markets in U.S. dollars.
An American depositary receipt (ADR) is a negotiable certificate, issued by a U.S. depositary bank, that represents a set number of shares in a foreign company. The bank holds the actual foreign shares abroad and issues receipts against them, letting American investors buy a stake in companies like foreign automakers or electronics firms without opening an overseas brokerage account.
ADRs trade on U.S. exchanges or over the counter just like domestic stock: prices are quoted in U.S. dollars, trades settle through U.S. systems, and dividends are collected by the bank, converted from the foreign currency, and paid to holders in dollars. One ADR can represent one foreign share, a fraction of a share, or several shares, depending on how the program is structured.
The convenience doesn't eliminate all foreign-investment risk. Because the underlying company earns and pays dividends in its home currency, ADR holders still face currency (exchange rate) risk on top of ordinary market risk. ADR investors also typically receive dividends but not the full rights of direct shareholders — voting rights generally stay with the depositary bank, and holders usually lack preemptive rights.
ADRs are a reliable exam topic. The SIE and Series 7 test their basic structure, dividend treatment, and currency risk, while the Series 66 covers ADRs in the context of foreign investments and their suitability for U.S. investors.
Key takeaways
- An ADR is a U.S. bank-issued receipt representing foreign shares, traded in U.S. dollars on U.S. markets.
- Dividends are converted by the depositary bank and paid to holders in dollars.
- ADR holders keep currency risk, since the underlying shares and dividends are denominated in a foreign currency.
- Holders generally receive dividends but not voting or preemptive rights.
- ADRs make foreign equity investing accessible without a foreign brokerage account.