ADR – Types and Advantages

American Depository Receipt is a depository receipt representing one or more shares of a foreign company that is traded publicly in U.S. markets. There are many two types of ADR, as unsponsored and sponsored ADR.

1. Unsponsored ADR – This is ADR which involve no direct involvement of the foreign company (whose shares are involved). Custodian banks buy shares of the company, hold then, and issues ADRs through a brokerage firm. The ADR holder may not receive all the benefits associated with the shares. Unsponsored ADRs are traded usually over-the-counter.
2. Sponsored ADR – This is ADR which involve direct involvement of foreign company. The company chooses a single depository bank and registers DRs with SEC. The ADR holder receives all share holder benefits. Sponsored ADRs are usually traded through major exchanges like NYSE and AMEX.

ADR holds many advantages for investors.

• ADRs help investors to invest in big foreign companies and are good instruments for portfolio diversification.
• They help the investors to profit from many emerging market companies (high risk high return instruments).
• All transactions including buying the shares, dividend payments and capital gains are done in U.S. Dollars.
• The competitive rates of Euro and U.S. Dollar over other market currencies also benefit the investor.
• ADRs offer more transparency and stability than trading the stock directly in a foreign market.

But ADRs also holds some additional risks; economic and political changes of foreign countries, currency-exchange rate changes and high volatility of foreign share prices, etc. can cause troubles.

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