American depositary receipt (ADR) - Financial definition
Concise definition of the term American depositary receipt
An American depository receipt (ADR) is a negotiable receipt on stocks held in custody abroad. It is issued by a US bank and traded either on a US stock exchange or over the counter.
Comprehensive definition of the term American depositary receipt
One ADR may represent one or more shares of a foreign stock, or a fraction of a share.
In order to issue ADRs, the US bank needs to hold the underlying shares either in a subsidiary abroad or in a financial institution in the country of origin of the stock.
An ADR gives its owner the right to obtain the foreign equity it represents. The holder of ADRs can thus, at any time, request the conversion of his certificates into actual shares of the foreign company.
ADRs allow investors to take a position in shares of a foreign company and to benefit from the same rights as a normal shareholder without actually having to detain the securities.
For foreign companies, they hold the advantage of being able to raise capital without having its shares to be quoted on a US stock exchange.