An American Depositary Share, also called an ADS, is the share of a foreign-based company denominated in US dollars which can be bought on a US stock exchange. The shares are issued by American depositary banks (custodian banks) under agreement with the overseas issuing company.
The whole issue is called an ADR (American Depositary Receipt). Each individual share is known as an ADS. The two terms are used today interchangeably, i.e. with the same meaning.
The US custodian bank has the corporate and economic rights of the foreign shares, subject to the terms included in the ADR certificate.
The foreign company may either list its shares over-the-counter (OTCC) or on a major exchange such as the New York Stock Exchange or Nasdaq, this will depend on its level of compliance with US securities regulations. OTC sales require a lower level of reporting.
To be traded on the major stock exchanges the level of reporting needs to be the same as for domestic companies, which have to adhere to GAAP accounting rules.
Benefits for the company and investors
These type of shares provide American investors with a convenient and reliable way to invest in foreign securities without having the hassle of dealing with cross-border transaction procedures.
Buying an ADS offers the same economic benefits enjoyed by the residents of the foreign company’s home country.
The foreign company, through ADRs, has direct access to the world’s largest investor market – the United States.
Even though an ADS is bought and sold in dollars and pays dividends in dollars, it is important to remember they carry a currency risk.
Their prices are originally quoted in the foreign company’s home country’s currency, which can fluctuate in value against other currencies, including the dollar.
Also, bear in mind that depositary shares do not protect you from political instability. Governments abroad can collapse, wars and revolutions may emerge, and new regimes might decide the nationalize companies.
“An American Depositary Share (“ADS”) is a U.S. dollar denominated form of equity ownership in a non-U.S. company.”
Depositary share programs exist in more than 70 countries.
Video – Depositary Receipts Market
Chris Kearns, CEO of BNY Mellon Depositary Receipts, talks about the Depository Receipts market. The term ‘Depository Receipts’ refers to foreign shares traded anywhere in the world, including American Depositary Receipts (American Depositary Shares).