American Depositary Receipts (ADRs)

What this video covers

• What an American Depositary Receipt (ADR) is: a negotiable certificate issued by a U.S. depositary bank representing shares in a foreign company, traded in U.S. dollars on U.S. markets
• The three-step mechanics of how foreign shares become tradable ADRs through a custodian bank and depositary bank
• The critical distinction between sponsored ADRs (foreign company involvement, SEC reporting, exchange eligibility) and unsponsored ADRs (no company involvement, minimal reporting, OTC only)
• The three sponsored ADR levels: Level 1 (OTC only, minimal registration), Level 2 (exchange-listed, SEC registration, annual reports), and Level 3 (exchange-listed, full SEC registration, can raise new capital)
• Why ADRs do not eliminate currency risk, and how exchange rate fluctuations affect ADR value even when the underlying foreign stock price is flat or positive
• How ADR dividends flow from foreign currency declaration through conversion to U.S. dollars, and the currency conversion risk borne by the investor
• The foreign tax credit available to U.S. investors when foreign governments withhold taxes on ADR dividends, preventing double taxation
• Voting rights: passed through to holders of sponsored ADRs, typically retained by the depositary bank for unsponsored ADRs