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What is an American Depository Receipt?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 10 September 2016
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An American depository receipt, or ADR, is a negotiable certificate that acts as a receipt for any shares of a stock not based in the United States. The stocks that are mentioned in an American depository receipt will be held by a US based financial institution and thus entitle shareholders to the capital gains and dividends that are relevant to the stock.

Negotiable certificates like an American depository receipt are one of the instruments that make the trading of foreign stock on a stock exchange possible. The usage of an American depository receipt makes if possible for US citizens to engage in the buying and selling of shares that are issued by companies based in another country, without the need to qualify for trading on a foreign stock market. Instead, the US citizen may engage in these types of investments through a US stock exchange.

A United States depository bank issues the American depository receipt. Foreign corporations will have authorized the bank to represent shares of their stock for this purpose. Essentially, the American depository receipt will trade like any other type of stock on a US exchange. Because the ADR is usually quoted in terms of American currency rather than the currency that is native to the foreign corporation that issues the stock, the ability to trade on the US market is simplified greatly.

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One of the advantages of the American depositary receipt to investors is that it makes it possible to diversify the stock portfolio. The ability to add foreign investments to domestic investments can be a great means of expanding the scope of the investments, as well as investing in foreign companies that do a great deal of business within the United States. There are a number of companies based in the United Kingdom, as well as a growing number of companies based in other parts of the world, that have chosen the method of an American depository receipt as a means of attracting US investors.

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