ADR definition

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An American Depositary Receipt (or ADR, for short) is a way in which US investors can trade shares of non-US companies without using their local exchanges.

Because they are issued by US financial institutions and traded on US exchanges, many of the complications associated with buying shares abroad are negated with ADRs, Dividends and profits from share price movements will all be paid in US dollars.

For a non-US company, ADRs are a good way to raise capital and gain more exposure to US equities investors.

How do ADRs work?

ADRs represent a certain number of shares in a particular company, and are traded exactly like US shares on US exchanges. To create an ADR, a financial institution - usually a US bank - will bulk buy a large amount of shares in its chosen company, and then reissue them on a stock exchange.

They will then decide how many shares a single purchase of an ADR will equate to. Some ADRs represent several actual shares in a company, whereas sometimes the price of real shares will exceed that of the ADR.

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To find out about the other types of share that are available, take a look at the shares trading education section.

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