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ADRs and GDRs: How Depositary Receipts Work

An ADR lets you buy a share of a foreign company through a US exchange without opening a foreign brokerage account -- here is the structure that makes that possible, and its quirks.

A depositary receipt represents shares held on your behalf abroad

A bank (the depositary) holds the actual foreign shares in custody in the company's home market and issues a receipt -- the depositary receipt -- that trades on a local exchange, representing a claim on those underlying shares without the investor ever directly holding foreign stock.

ADR vs. GDR: mainly a difference of which market

An American Depositary Receipt (ADR) trades on US exchanges or over-the-counter, denominated in US dollars. A Global Depositary Receipt (GDR) is the broader term, typically used for receipts listed on exchanges outside the US, such as in London or Luxembourg, often used by a company to raise capital across multiple markets at once.

ADRs come in sponsored and unsponsored, and different listing levels

A sponsored ADR is created with the foreign company's cooperation and typically involves more disclosure. Unsponsored ADRs are created by a bank without the company's direct involvement. Sponsored ADRs are further split into Level I (over-the-counter, minimal reporting), Level II and III (listed on a major exchange, fuller SEC reporting, with Level III allowing the company to raise new capital).

One ADR doesn't always equal one underlying share

The depositary sets a ratio -- for example, one ADR might represent two underlying shares, or one underlying share might require ten ADRs to equal it -- chosen partly to bring the ADR's per-unit price into a range that is typical for the destination market, so comparing an ADR's raw share price to the foreign stock's price directly can be misleading without accounting for the ratio.

Price gaps and currency risk are built into the structure

An ADR's price should track the underlying share's price adjusted for the ratio and exchange rate, but time-zone gaps between markets, liquidity differences, and currency fluctuation can create small persistent gaps, and a US-dollar-denominated ADR still carries the underlying currency's exchange-rate risk even though you never touch foreign currency directly.

Dividends get converted and typically reduced by a fee

If the underlying foreign company pays a dividend, the depositary bank converts it from the local currency to US dollars and passes it to ADR holders, usually after deducting a custody or conversion fee and any foreign withholding tax -- so an ADR's net dividend is often somewhat lower than a naive currency conversion of the original dividend would suggest.

Why ADRs exist at all

Before ADRs, buying foreign stock directly meant opening a foreign brokerage account, dealing with a different currency, different settlement rules, and often different tax withholding procedures -- a real barrier for most individual investors. ADRs package all of that custodial complexity into a security that trades and settles exactly like a normal US stock.

The underlying company doesn't disappear just because you are buying a receipt

An ADR holder is still exposed to everything that affects the underlying foreign company and its home market -- local political risk, that country's currency movements against the dollar, and local disclosure standards that may be less extensive than US requirements, particularly for unsponsored or Level I ADRs.

Frequently Asked Questions

Do I receive dividends the same way as with a regular US stock?

You receive dividends, but they are converted from the foreign currency to US dollars by the depositary bank first, typically with a small fee deducted and foreign withholding tax applied before you receive the net amount -- the process and timing can differ somewhat from a domestic stock's dividend.

Are all ADRs listed on major exchanges like the NYSE or Nasdaq?

No. Only Level II and Level III sponsored ADRs are listed on major exchanges. Level I sponsored ADRs and unsponsored ADRs typically trade over-the-counter, which generally comes with less liquidity and less regulatory disclosure than an exchange listing.