American Depositary Share (ADS)

Definition

An American Depositary Share (ADS) is a U.S dollar-denominated equity share of a foreign-based company available for purchase on an American stock exchange. These shares represent the foreign shares of the company held by a U.S. depositary bank, allowing U.S. investors to buy shares in foreign companies without the need for cross-border transactions. Each ADS represents one or more regular shares of the foreign company.

Phonetic

American: əˈmɛrɪkənDepositary: dɪˈpɒzɪˌtɛriShare: ʃɛrADS: eɪ diː ɛs

Key Takeaways

1. An American Depositary Share (ADS) represents a specific amount of shares in a foreign corporation. This arrangement allows U.S. investors to purchase shares of foreign companies without the need to deal with the complexities of cross-border and cross-currency transactions.
2. They provide a method for American investors to invest directly in foreign-based companies, allowing these companies to raise capital on the U.S. market. ADS also offers a way for non-U.S. companies to establish a presence in the American financial markets. It does this while bypassing the regulatory hurdles that often come with attempting a dual listing on an American exchange.
3. Despite the benefits, investing in ADS also carries some risks. These include currency risk (if the foreign currency depreciates against the U.S. dollar, the value of the ADS decreases), as well as country risk (economic instability in the home country of the foreign company can affect the ADS value).

Importance

The American Depositary Share (ADS) is a significant concept in finance because it allows U.S. investors to conveniently invest in foreign companies without dealing with the complexities of trading directly on foreign markets. Each ADS represents a specified number of shares in a foreign corporation and is issued by U.S. depositary banks, which hold the company’s underlying shares. This means investors can buy and sell ADSs just like regular stocks, which simplifies the process of investing in international companies, provides opportunities for portfolio diversification, and potentially helps reduce foreign investment risks. Furthermore, companies benefit as well because it allows them to raise capital in the U.S. market without listing directly on a U.S. stock exchange.

Explanation

American Depositary Share (ADS) serves a critical role in connecting domestic investors to foreign investment opportunities, enabling U.S. investors to buy shares in foreign companies without the hazards of cross-border and cross-currency transactions. ADSs represent a specified number of shares in a foreign corporation and are issued by U.S. depositary banks. They are a convenient and cost-effective way for U.S. investors to own shares in foreign firms that might not otherwise be accessible. Through ADSs, companies can also attract investments from overseas, thereby capitalizing on international markets.ADSs are typically traded on U.S. markets, like any domestic stock, providing a means for individuals and institutions to invest in foreign companies while overcoming issues of differing currency values or practices in foreign markets. They serve to raise capital in a foreign country without putting off potential investors because of unfamiliarity or perceived risk of investing in a foreign market. Ultimately, the main purpose of ADSs is to facilitate the trading, ownership, and investment in foreign corporations by U.S. investors and to boost the financial and operational growth of foreign corporations.

Examples

1. Alibaba Group Holding Limited: This is one of the most famous examples of a non-U.S. company using American Depositary Shares to raise capital on U.S. markets. The Chinese e-commerce giant opted for ADS when it debuted on the New York Stock Exchange in 2014, raising $25 billion in the largest-ever IPO at the time. These shares don’t represent ownership in the corporation itself, but they equate to a certain number of the corporation’s actual shares.2. British Petroleum (BP): BP is a British multinational oil and gas company. It is one of the world’s seven oil and gas “supermajors” , whose performance can significantly impact the economy in the United States and globally. Despite being based in the UK, BP is listed on the NYSE in the form of ADS. Each BP ADS represents six ordinary shares.3. Tata Motors Limited: This is India’s largest automobile company, and it’s also listed on the NYSE through ADS. Tata’s ADS shares represent ordinary equity shares on a one-for-one basis. Notably, these ADS were also used in 2008 when Tata Motors acquired luxury auto brands Jaguar and Land Rover from Ford.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Depositary Receipt (DR): A negotiable certificate that represents a certain number of shares in a foreign corporation. Issued by banks, DRs make it easier for investors to own shares in foreign companies as they are traded on local exchanges.
• Sponsored and Unsponsored ADS: A sponsored ADS is one where the foreign company has a formal agreement with the depositary bank issuing the ADS. An unsponsored ADS is issued without the involvement or consent of the foreign company.
• ADR Ratio: The ratio that shows how many ADSs represent one ordinary share of a company. An ADR ratio of 1:10 means that one ADS is equivalent to 10 ordinary shares.
• ADR Fee: The fees charged by depositary banks to cover the costs of managing the ADRs. This might be passed onto investors in the form of an annual fee.
• Home Market: This term refers to the original market where the shares of the foreign company are traded.

Sources for More Information

• Investopedia
• U.S. Securities and Exchange Commission
• Corporate Finance Institute
• The New York Stock Exchange