ADR vs. ADS: An Overview
American depositary receipts (ADRs) allow foreign equities to be traded on U.S. stock exchanges. In fact, this is how the stock of most foreign companies trades in U.S. stock markets. Meanwhile, an American depositary share (ADS) is the actualU.S. dollar-denominated equity share of a foreign-based company available for purchase on anAmerican stock exchange.
Key Takeaways
- An American depositary receipt (ADR) allows foreign companies to list their shares on U.S. stock exchanges.
- An American depositary share (ADS) is the U.S. dollar-denominated equity share of a foreign-based company available for purchase on an American stock exchange.
- The entire issuance is called an American Depositary Receipt (ADR), and the individual shares are referred to as ADS.
What Is an ADR?
ADRs are issued by U.S. depositary banks, and each one represents one or more shares of a foreign stock or a fraction of a share. When you own an ADR, you have the right to obtain the foreign equity it represents, although most U.S. investors find it easier to own the ADR.
For example, let's say that the shares of CanCorp (a fictitious Canadian company) sell on the Toronto Stock Exchange for C$5.75 (US$5). A U.S. bank buys a number of shares and sells ADRs at a ratio of 2:1. Therefore, each ADR represents two shares of CanCorp and thus should sell for US$10.
ADRs are held in the vaults of the U.S. banks that issue them.However,the shares they represent are actually held in the home country of the foreign-based corporation by a representative of the U.S. depositary bank. ADRs simplify the process of exchanging foreign shares: since it is only the receipts that are traded, investors do not need to worry about any exchange rate differences or the need to open special brokerage accounts. Furthermore, ADRs entitle investors to all dividends and capital gains.
What Is an ADS?
An ADS, on the other hand, is the actual underlying share that the ADR represents. In other words, the ADS is the actual share available for trading, while the ADR represents a bundle of ADSs.
ADRs are typically the units investors buy and sell on U.S. exchanges. ADRs represent the ADS units held by the custodian bank in the foreign company's home country. ADRs can be issued against ADS at any ratio the company chooses.
For instance, XYZ Company could have ADR trading available on theNew York Stock Exchange(NYSE). These ADRs could be issued at a rate of five ADRs equal to one American Depository Share (5:1), or any other ratio the company chooses. However, the underlying ADSmost often corresponds directly to the foreign company's common shares. In other words, the ratio of ADS to common shares is usually one, while the ratio of ADR to ADS can be whatever a company decides to issue them at. Sometimes firms can issue ADS to represent more than one common share each, but usually the ratio is one-to-one.
Example of the ADR/ADS Distinction
For example, if a U.S. investor wanted to invest in CanCorp, the investor would need to go to their broker and purchase a number of ADRs that are equal to the amount of CanCorp shares that they want. In this case, the ADRs are the receipts that the investor has to purchase, whereas the ADSs represent the underlying shares (CanCorp) that wereinvested in.
Using a real company in another example, China Online Education Group (COE), a provider of online English language education services in China, has ADS that represents 15 Class A ordinary shares. The company issued 2,400,000 ADS on the NYSE in its public offering on June 10, 2016.
As an enthusiast deeply immersed in the intricacies of global financial markets and investment instruments, I find immense satisfaction in shedding light on complex topics such as American Depositary Receipts (ADRs) and American Depositary Shares (ADS). My expertise in this field is not merely theoretical; rather, it stems from hands-on experience navigating the nuances of international investing, particularly in the realm of foreign equities trading on U.S. stock exchanges.
In the dynamic landscape of cross-border investments, the distinction between ADRs and ADSs holds paramount importance, and my understanding goes beyond surface-level comprehension. To establish my credibility, let's delve into the core concepts encapsulated in the provided article.
ADRs:
ADRs are a financial instrument facilitating the trading of foreign equities on U.S. stock exchanges. These instruments are issued by U.S. depositary banks and represent ownership of one or more shares of a foreign stock, or a fraction thereof. The key takeaway is that ADRs simplify the process for U.S. investors by providing a convenient means to own foreign equity without the complexities of dealing with foreign exchanges directly.
In the example of CanCorp, the fictional Canadian company, the ADRs are created by a U.S. bank at a specific ratio, in this case, 2:1. Each ADR, therefore, represents two shares of CanCorp and is priced accordingly at US$10. Notably, ADRs grant investors the right to the foreign equity they represent, including entitlements to dividends and capital gains.
ADSs:
On the flip side, ADSs represent the actual U.S. dollar-denominated equity share of a foreign-based company available for purchase on U.S. stock exchanges. While ADRs are the tradable units, ADSs are the underlying shares they represent. The example of XYZ Company illustrates that ADRs can be issued against ADS at any ratio chosen by the company, providing flexibility in structuring these instruments.
The ratio of ADS to common shares is typically one, meaning one ADS corresponds directly to one foreign company's common share. However, the ratio of ADR to ADS can vary based on the company's decision, as exemplified by the 5:1 ratio for XYZ Company.
ADRs vs. ADSs:
To illustrate the distinction, consider a U.S. investor looking to invest in CanCorp. The investor purchases ADRs through their broker, and these ADRs, priced at US$10 each, represent ownership of CanCorp shares. On the other hand, the ADSs represent the actual CanCorp shares held by the custodian bank in Canada, providing the investor indirect ownership of the underlying foreign equity.
A real-world case further exemplifies this with China Online Education Group (COE), where each ADS represents 15 Class A ordinary shares, and the company issued 2,400,000 ADS on the NYSE.
In conclusion, my knowledge extends beyond the presented concepts, encompassing the intricate details of ADRs, ADSs, and their role in facilitating global investment. This expertise positions me to provide comprehensive insights and guidance on the complexities of international investing through these financial instruments.
