ADR / GDR
Also known as: Depositary receipts, American Depositary Receipt
A foreign share repackaged to trade on your home exchange, in your currency.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat is it, really?
A depositary receipt lets you buy a foreign company on your local exchange. An American Depositary Receipt (ADR) is a US-listed certificate representing shares of, say, a Japanese or Brazilian company; a Global Depositary Receipt (GDR) is the same idea listed in London or elsewhere.
Behind the scenes, a custodian bank holds the real shares in the home market and issues receipts against them. Each receipt represents a fixed number of underlying shares (the ratio — e.g. 1 ADR = 2 shares, or 1 ADR = 0.1 share for expensive stocks).
For you it feels like any domestic stock: dollar prices, dollar dividends (the bank converts them), your usual broker. The company gets access to a much larger pool of investors.
- Asset class
- Cash equities
- Instrument type
- Depositary receipt
- Traded
- Exchange or OTC
- Typical users
- Investors wanting foreign stocks without foreign accounts
3 · IntermediateHow it works in practice
Levels and flavours
- Level I — OTC-traded, minimal disclosure; Level II — exchange-listed; Level III — exchange-listed and capital-raising (full SEC reporting).
- Sponsored (company appoints the depositary) vs. unsponsored (banks create receipts without the company's involvement).
What you actually bear
- FX risk: the ADR is priced in dollars, but its value tracks the home-market price times the exchange rate. A rally in Tokyo can be wiped out by a weaker yen.
- Fees: depositary banks charge custody/dividend-handling fees (a few cents per receipt per year), usually netted from dividends.
- Withholding tax on dividends at the home country's rate, sometimes partially reclaimable.
Receipts are fungible: brokers can convert local shares into ADRs and back, which keeps prices aligned across markets.
4 · AdvancedPricing & valuation
No-arbitrage pricing
With home-market price \(S^{loc}\), FX rate \(X\) (dollars per unit of local currency) and ratio \(k\) shares per receipt:
What the symbols mean
- Pa price, or a present value
- Dduration: how far a bond's cash flows sit in the future
- Ra return
- Sthe price of the underlying today
- cthe coupon rate
where \(c\) covers conversion fees, settlement timing and borrow costs. Deviations beyond \(c\) are traded away by cross-border desks — except where capital controls or conversion limits bind (e.g. some EM names), where persistent premia/discounts become a price of convertibility.
When markets don't overlap
Most ADR home markets are closed during US hours, so the ADR trades on a proxy-implied fair value: home close, adjusted by index futures beta and live FX — the same machinery as international ETF pricing. Overnight, the home market opens and typically gaps to where the ADR "predicted".
Corporate actions and taxes
Dividends flow: local gross dividend → home withholding tax → depositary fee → FX conversion → ADR holder. Effective yield is therefore below the local headline yield; treaty rates and reclaim procedures matter for institutional holders. Ratio changes act like splits and are value-neutral.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.