What is the full form of ADR.
ADR: American Dipository Receipt.
American Depositary Receipts (ADRs) are the stocks of the foreign companies which are traded in the American markets. ADRs are purchased by the investors in U.S. dollars during the normal trading hours in the U.S. market through the brokers of the U.S. which allows the people of America to invest in foreign companies. The ADR was firstly created in the year 1927 by the J.P. Morgan in which Americans were allowed to invest in Selfridges’s shares which is a British department store.
Presently there are thousands of ADRs available which represents the shares of different companies located in different countries. According to the Securities and Exchange Commission (SEC), it is more convenient for the investors to own ADRs in place of the foreign stock itself because they have protection and transparency in case of ADRs facilitated by the U.S. securities regulation.
How does it works.
A depositary receipt typically requires a company to meet a stock exchange’s specific rules before listing its stock for sale. For example, a company must transfer shares to a brokerage house in its home country. Upon receipt, the brokerage uses a custodian connected to the international stock exchange for selling the depositary receipts. This connection ensures that the shares of stock actually exist and no manipulation occurs between the foreign company and the international brokerage house.
1.The issuing bank in the U.S. studies the financials of the foreign company in detail to assess the strength of its stock.
2.The bank buys shares of the foreign company.
3.The shares are grouped into packets.
4.Each packet is issued as an ADR through an American stock exchange.
5.The ADR is priced in dollars, and the dividends are paid out in dollars as well, making it as simple for an American investor to buy as the stock of a U.S.-based company.
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