American Depositary Receipt (ADR)
A US-traded certificate representing shares in a foreign company, allowing Americans to invest in foreign stocks on US exchanges.
What is ADR?
An American Depositary Receipt (ADR) is a negotiable certificate issued by a US depositary bank that represents a specific number of shares in a foreign company. ADRs are traded on US stock exchanges (NYSE, Nasdaq, OTC markets) in US dollars, making it easy for American investors to buy shares in foreign companies without navigating foreign exchanges, currencies, or settlement systems. A depositary bank (e.g., Bank of New York Mellon, Citibank) holds the underlying foreign shares and issues ADR certificates against them. ADRs pay dividends in US dollars (converted from the foreign currency). Well-known ADRs include Alibaba (BABA), Toyota (TM), BP (BP), and Samsung's OTC ADR. Risks include currency risk, political risk, and sometimes less disclosure than US companies.
Example
Alibaba Group listed its ADRs on the NYSE in September 2014 in the largest IPO in US history at that time, raising $25 billion. Each ADR represents 8 ordinary shares of Alibaba listed in Hong Kong. American investors can buy BABA on the NYSE in dollars without needing a Hong Kong brokerage account, though they are exposed to renminbi/dollar exchange rate fluctuations.