American Depositary Share (Ads)

American Depositary Share (ADS) American Depositary Shares (ADSs) let U.S. investors buy equity in non‑U.S. companies on U.S. exchanges without trading on foreign markets. They are issued by a U.S. depositary bank and trade in U.S. dollars, representing a specified number of underlying foreign shares. What an ADS Is
* An ADS represents one or more shares of a foreign company held by a U.S. depositary bank.
* The depositary bank establishes the ADS-to-underlying‑share ratio and issues negotiable certificates that trade in the U.S.
* ADSs are denominated and settled in U.S. dollars and can trade on major exchanges (NYSE, Nasdaq) or over‑the‑counter (OTC).
How ADSs and ADRs Work
* American Depositary Receipt (ADR) is the negotiable certificate issued by the depositary bank that evidences ownership of ADSs. In practice, "ADS" refers to the shares and "ADR" to the certificate that facilitates U.S. trading.
* Sponsored ADRs: established with the cooperation of the foreign company and typically listed on major U.S. exchanges; they often require SEC filings and financial reporting consistent with U.S. standards (or reconciliations).
* Unsponsored ADRs: created without the foreign company’s direct involvement and usually trade OTC.
* Dividends paid by the foreign company are converted to U.S. dollars by the depositary bank before distribution to ADS holders.
Advantages
* Simplifies access to foreign equities for U.S. investors—no need to open foreign brokerage accounts or handle foreign currencies.
* Allows foreign companies to reach U.S. investors and raise capital in U.S. markets.
* ADSs can improve liquidity and visibility compared with trading on the company’s home exchange.
Risks and Drawbacks
* Currency risk: exchange‑rate movements affect the USD value of ADSs and dividend payments.
* Tax complexity: dividends may be subject to foreign withholding taxes and U.S. tax rules; investors should understand withholding, potential credits, and how to report foreign taxes (e.g., IRS procedures for foreign tax credits).
* Liquidity and price gaps: ADS prices can gap when the home market is open and U.S. markets are closed.
* Regulatory and reporting differences: unsponsored ADRs may have less disclosure than sponsored listings.
* Arbitrage between ADS and underlying shares is possible but can be costly and operationally complex.
Practical Considerations for Investors
* Verify whether an ADR is sponsored or unsponsored—sponsored ADRs generally offer more transparency and exchange listing.
* Check the ADS-to-underlying‑share ratio and how corporate actions (splits, dividends) are handled.
* Confirm where the ADS trades (NYSE/Nasdaq vs. OTC) to assess liquidity and trading costs.
* Review tax implications, including any foreign withholding and how to claim foreign tax credits if applicable.
* Be aware of the depositary bank that manages the ADR/ADS (major providers include JPMorgan Chase, Citigroup, Bank of New York Mellon, and Deutsche Bank).
Examples and Special Cases
* A single ADS can represent multiple underlying ordinary shares (or a fraction) depending on the ratio set by the depositary bank.
* Some foreign companies instead list their ordinary shares directly in the U.S.; these tickers often include an indicator (historically “F”) showing foreign status rather than trading via ADRs.
ADS vs. ADR — Quick Comparison
* ADS: the U.S.-denominated share representing ownership of the foreign stock held by the depositary bank.
* ADR: the certificate issued by the depositary bank that facilitates trading of the ADS in U.S. markets.
Conclusion ADSs/ADRs provide a convenient way for U.S. investors to access foreign equities in U.S. dollars while allowing foreign companies to tap U.S. capital markets. They simplify trading and dividend conversion but introduce currency exposure, tax complexity, and potential liquidity differences. Investors should review the type of ADR, the depositary bank, tax implications, and the ADS-to-underlying ratio before investing. Explore More Resources