A flexible certificate which is issued by a depository bank in the United States is referred to as an American Depositary Receipt (ADR). This certificate characterizes a specific number of shares or can be issued for a single share also and even for making an investment in the stocks of any foreign company. Just like stocks, ADRs also trade on the U.S. stock exchange market.
One of the main advantages of ADRs is that one can trade on many stocks internationally also, because of which there is a dual benefit on both sides. Some of the international companies which are otherwise not unlocked to doing commerce on the United States market can also trade via ADRs.
ADRs are traded only in the denomination of American dollar. This makes the trader’s tension free in terms of trading because they do not have to deal in different currencies. ADRs deal in New York Stock Exchange (NYSE), NASDAQ, and American Stock Exchange (AMEX) and also via Over-the-Counter (OTC) contracts. United States’ stock market gets another plus point because any overseas trade is only made when the country shares the full financial report about the companies and their stocks.
ADRs are categorized as follows-
- Sponsored ADRs
The foreign companies that get issued ADRs from American banks have to pay all the costs of the ADR and with this, they also get complete control over their transactions. An authorized contract is made between both the teams and the bank handles all the dealings. Such American Depositary Receipts are called Sponsored ADRs. Furthermore, the foreign companies should totally meet the terms set by the U.S. Securities and Exchange Commission (SEC) and also the procedures of American accounting.
- Unsponsored ADRs-
Such ADRs are not for any foreign companies directly. These can be issued by banks to those foreign companies which have already obtained sponsored ADRs from any other bank. These ADRs can have different dividends. A foreign company can have only one sponsored ADR and various unsponsored ADRs.
The major difference between these two ADRs is that where the sponsored ADRs can trade via all transactions and on all major stock exchanges of the U.S., unsponsored ADRs can only trade through the Over-the-Counter (OTC) trades. Also, sponsored ADRs are generally registered and licensed with voting rights.
There is another classification stage of ADRs where these are sorted amongst various levels. These are stated as follows-
- LEVEL 1
Not all foreign companies can trade with this type of ADR and some of the companies do not even meet the criteria to trade in this ADR. Such ADRs are not utilized to raise capital but they can be used to set up their trading existence. Also, these only trade via Over-the-Counter dealings. These are also more speculative than all other ADRs. Investors who take risks are the ones who typically deal here. Their cheap cost is the basic reason of attraction for many traders to make an investment in these.
- LEVEL 2
These ADRs are also not employed in raising capitals but have the potency to create their trading presence. These are overall better than the Level 1 ADRs because they have better requirements from the Securities and Exchange Commission and also get superior trading volume and greater visibility.
- LEVEL 3
These are the best because they along with establishing their trading presence also give foreign issuers an opportunity to raise capitals. These ADRs have to be completely reported to the Securities and Exchange Commission and this accounts for their greater transparency.