ADR vs. ADS: An Overview
American depositary receipts (ADRs) allow foreign equities to be traded on U.S. stock exchanges. In fact, this is how the stock of most foreign companies trades in U.S. stock markets. Meanwhile, an American depositary share (ADS) is the actualU.S. dollar-denominated equity share of a foreign-based company available for purchase on anAmerican stock exchange.
Key Takeaways
- An American depositary receipt (ADR) allows foreign companies to list their shares on U.S. stock exchanges.
- An American depositary share (ADS) is the U.S. dollar-denominated equity share of a foreign-based company available for purchase on an American stock exchange.
- The entire issuance is called an American Depositary Receipt (ADR), and the individual shares are referred to as ADS.
What Is an ADR?
American depositary receipts (ADRs) are issued by U.S. depositary banks, and each one represents one or more shares of a foreign stock or a fraction of a share. When you own an ADR, you have the right to obtain the foreign equity it represents, although most U.S. investors find it easier to own the ADR.
For example, let's say that the shares of CanCorp (a fictitious Canadian company) sell on the Toronto Stock Exchange for C$5.75 (US$5). A U.S. bank buys a number of shares and sells ADRs at a ratio of 2:1. Therefore, each ADR represents two shares of CanCorp and thus should sell for US$10.
ADRs are held in the vaults of the U.S. banks that issue them.However,the shares they represent are actually held in the home country of the foreign-based corporation by a representative of the U.S. depositary bank. ADRs simplify the process of exchanging foreign shares: since it is only the receipts that are traded, investors do not need to worry about any exchange rate differences or the need to open special brokerage accounts. Furthermore, ADRs entitle investors to all dividends and capital gains.
ADRs have different levels (I, II, and III) indicating varying degrees of access to U.S. markets and reporting requirements.
What Is an ADS?
An American depositary share (ADS), on the other hand, is the actual underlying share that the ADR represents. In other words, the ADS is the actual share available for trading, while the ADR represents a bundle of ADSs.
ADRs are typically the units investors buy and sell on U.S. exchanges. ADRs represent the ADS units held by the custodian bank in the foreign company's home country. ADRs can be issued against ADS at any ratio the company chooses.
For instance, XYZ Company could have ADR trading available on theNew York Stock Exchange(NYSE). These ADRs could be issued at a rate of five ADRs equal to one American Depository Share (5:1), or any other ratio the company chooses. However, the underlying ADSmost often corresponds directly to the foreign company's common shares. In other words, the ratio of ADS to common shares is usually one, while the ratio of ADR to ADS can be whatever a company decides to issue them at. Sometimes firms can issue ADS to represent more than one common share each, but usually the ratio is one-to-one.
Example of the ADR/ADS Distinction
For example, if a U.S. investor wanted to invest in CanCorp, the investor would need to go to their broker and purchase a number of ADRs that are equal to the amount of CanCorp shares that they want. In this case, the ADRs are the receipts that the investor has to purchase, whereas the ADSs represent the underlying shares (CanCorp) that wereinvested in.
Using a real company in another example, China Online Education Group (COE), a provider of online English language education services in China, has ADS that represents 15 Class A ordinary shares. The company issued 2,400,000 ADS on the NYSE in its public offering on June 10, 2016.
What Purpose Do ADRs Serve for U.S. Investors?
ADRs serve a pivotal role for U.S. investors by providing a seamless pathway to invest in foreign companies without navigating the complexities of foreign exchanges. They act as negotiable instruments traded on U.S. markets, enabling investors to diversify their portfolios internationally.
What Are the Different Types of ADR Programs?
ADR programs come in Sponsored and Unsponsored forms, with varying levels (I, II, and III) indicating the degree of access to U.S. markets and reporting requirements. Sponsored ADRs involve cooperation between the foreign issuer and a U.S. depository bank, while Unsponsored ADRs lack such collaboration.
What Risks Are Associated with Exchange Rate Dynamics in ADRs and ADSs?
Both ADRs and ADSs expose investors to exchange rate risk. Changes in currency values can impact the value of these instruments, potentially affecting the returns for U.S. investors.
How Do Depository Banks Play a Role in ADR Issuance?
Depository banks play a pivotal role in the issuance and management of ADRs. They act as intermediaries, converting foreign shares into ADRs that can be traded on U.S. exchanges. These banks also handle the distribution of dividends and other corporate actions.
The Bottom Line
ADRs (American Depositary Receipts) are a broader category representing ownership of foreign shares, while ADSs (American Depositary Shares) specifically denote ownership by indicating a set number of ADRs. In essence, ADSs are a more granular representation of ownership within the larger scope of ADRs.
