American Depository Receipt (ADR)

An American Depository Receipt (ADR) is a negotiable security issued by a US bank. This type of paper is characterized by representing a group of shares of non-US companies that, moreover, are not listed on US financial markets.

In other words, an ADR is an instrument to invest from the US in shares in non-US companies.

In this sense, we must reiterate that the ADRs represent shares of companies that are not listed in the US. For example, it may be a Colombian or Chilean company that has not yet met all the requirements to list its shares on the US stock markets.

It should also be noted that the ADR can represent an individual share, a part or fraction of a share, or even several shares of the foreign company in question.

These instruments not only give more investment options to Americans, but also benefit foreign companies, since they will be able to have a presence in the US without having to list in that country.

Characteristics of American Depository Receipts (ADR)

Among the characteristics of American Depository Receipts (ADR) we can highlight:

  • ADRs (although not all, as we will explain later) are listed on US stock exchanges, such as the New York Stock Exchange (NYSE).
  • ADRs are also traded on the over the counter (OTC) market. This is the one where there is no supervision by a clearing house.
  • The ADRs and the dividends they pay are denominated in US dollars.
  • The banks that issue ADRs request financial information from foreign companies to help investors make an adequate evaluation before making their investment.
  • The bank pays dividends to ADR holders, but discounting costs and taxes.
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Types of ADRs

There are mainly three types of ADR:

  • Level I: Its trading is done on the OTC market. They tend to have more risk in relation to the other types of ADR. They meet the minimum requirements of the United States Securities and Exchange Commission or SEC.
  • Level II: They are traded on US stock exchanges such as the NYSE. They tend to be more stringent than Tier I ADRs. They can be used (by the non-US company) to gain a commercial presence, but not to raise capital.
  • Level III: Unlike the previous ones, they allow launching a public offering of ADRs on a US stock market, that is, raising capital, and they are subject to submitting complete information to the SEC.

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