Understanding American Depositary Receipts ADRs: Types, Pricing, Fees, Taxes

GDRs are generally referred to as European Depositary Receipts, or EDRs, when European investors wish to trade locally the shares of companies located outside of Europe. The entire process helps companies reach foreign investors without the usual complications of cross-border trading. Investors should carefully evaluate their objectives, considering factors like currency denomination, regulatory environments, and the desired geographic reach.

Investing in international securities allows you to open your investment portfolio up to greater rewards (along with the risks). Investing in an ADR may incur additional fees that are not charged for domestic stocks. The depositary bank that holds the underlying stock may charge a fee, known as a custody fee, to cover the cost of creating and issuing an ADR.

Trading GDRs

The fee will be either deducted from dividends or passed on to the investor’s brokerage firm. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.

1. All except the lowest level of sponsored ADRs register with the SEC and trade on major U.S. stock exchanges.
2. With these, an issuer floats a public offering of ADRs on a U.S. exchange.
3. The trading process involving GDRs is regulated by the exchange on which they trade.
4. ADRs are U.S. dollar-denominated certificates that trade on American stock exchanges and track the price of a foreign company’s domestic shares.
5. Depending on where they are issued and listed, GDRs can be denominated in various currencies, such as U.S. dollars, euros, or other significant currencies.

Level I

The depositary bank will hold the underlying shares and issue an ADR for domestic trading. Domestic-domiciled securities are freely traded on their corresponding domestic exchanges daily through brokers and brokerage platforms. These domestic domiciled securities are issued and managed by the executive management of the domestic company. Depositary receipts, however, are shares of a foreign company offered in another foreign market. Depositary receipts can be structured in multiple ways and allow foreign investors to invest in foreign companies through their own domestic exchanges.

This certificate represents no direct involvement, participation, or even permission from the foreign company. GDRs are commonly used by issuers to raise capital from international investors through private placement or public stock offerings. ADRs are alternative investments that include additional risks that should be thoroughly analyzed by American investors. Hypothetically, an investor could choose to broaden their investing universe by choosing to consider ADRs. ADRs ultimately increase the investment options for U.S. investors.

Global Depositary Receipts (GDRs)

ADRs are additionally categorized into three levels, depending on the extent to which the foreign company has accessed the U.S. markets. Due to the trading activity called arbitrage, a GDR’s price closely tracks that of the international company’s stock on its home exchange. Primarily the risk of currency found in conversion with the payment of dividends.

Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. GDRs offer potentially higher returns for companies in emerging markets. ADRs’ return potential is influenced by US market trends and the performance of the issuing company. Depending on where they are issued and how they are listed, GDRs can be categorized into various categories.

These are called unsponsored ADRs, which have no direct involvement by the company. In fact, some companies may not even provide permission to list their shares this way. One of the most obvious benefits of investing in ADRs is difference between adr and gdr that they provide investors with a way to diversify their portfolios.

The GDR is then issued by the depositary bank on a local stock exchange. The underlying shares remain on deposit with the depositary bank (or custodian bank in the international country). A U.S.-based company that wants its stock to be listed on the London and Hong Kong Stock Exchanges can accomplish this via a GDR. The U.S.-based company enters into a depositary receipt agreement with the respective foreign depositary banks.

Level I ADRs found only on the over-the-counter market have the loosest requirements from the Securities and Exchange Commission (SEC) and are typically highly speculative. While they are riskier for investors than other types of ADRs, they are an easy and inexpensive way for a foreign company to gauge the level of U.S. investor interest in its securities. This is the most basic type of ADR, where foreign companies either don’t qualify or don’t want their ADR listed on an exchange. This type of ADR can be used to establish a trading presence but not to raise capital. ADRs are only offered by a foreign company through a share offering in the United States. GDRs will usually be offered in multiple countries as part of a GDR program.

What are the risks associated with investing in ADRs and GDRs?

Foreign companies and their depositary bank intermediaries must comply with all U.S. laws for issuing ADRs. This makes ADRs subject to U.S. securities laws as well as the rules of exchanges. Depository Receipts help the Non-Resident Indian’s or foreign investors to invest in Indian companies by using their regular equity trading account.

This allows traders to profit from differences in the asset’s listed price. As with Level I ADRs, Level II ADRs can be used to establish a trading presence on a stock exchange and can’t be used to raise capital. Level II ADRs have slightly more requirements from the SEC than Level I ADRs, but they get higher visibility and trading volume.

In turn, these banks package and issue shares to their respective stock exchanges. These activities follow the regulatory compliance regulations for both of the countries. An American depositary receipt represents shares in a foreign company and is listed only on American exchanges. A GDR represents shares in a company being on various foreign stock exchanges. Global depositary receipts allow a company to list its shares in more than one country outside of its home country. For example, a Chinese company could create a GDR program that issues its shares through a depositary bank intermediary into the London market and the United States market.