American Depositary Receipt (ADR)

When a company is listed only on a foreign exchange — say, a Japanese or Brazilian stock market — US-based traders cannot easily buy its shares directly. They would need a foreign brokerage account, foreign currency, and familiarity with overseas settlement rules. An ADR solves this by letting a US bank (called the depositary bank) hold the actual foreign shares and issue receipts against them that trade on US exchanges like ordinary stocks, quoted in US dollars. Each ADR can represent one foreign share, a fraction of one, or several — the ratio is set when the ADR is created.

ADRs show up on market-data platforms under standard US ticker symbols and report prices in dollars. This means a price change column on an ADR reflects two things simultaneously: the movement of the underlying foreign stock and any shift in the exchange rate between the dollar and the foreign currency. Even if the stock was flat on its home exchange, the ADR price can move because the currency moved. Readers tracking ADRs should keep the currencies page in view alongside the equity price.

There are three levels of ADRs. Level I trades over the counter with minimal US reporting requirements. Level II and Level III are listed on major exchanges and require progressively more disclosure to US regulators. Sponsored ADRs are set up with the foreign company's cooperation; unsponsored ones are created by banks without the company's direct involvement. A common confusion is treating an ADR as identical to buying the foreign share — it behaves similarly, but holders have receipts backed by a depositary arrangement, not direct share ownership under the foreign company's home rules.