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.
a paymentonly if a condition is metnot a payment
The company declares one amount. Two deductions happen before it gets to you, and neither of them is on your contract note.
When you buy
- You → Depositary bank Bought on your own exchange, in your own currency, under your own market's rules. What you hold is a receipt for shares somebody else is holding abroad.
When a dividend is declared
- Foreign company → Depositary bank Paid in the home market and in the home currency, to the registered holder — which is not you.
- Depositary bank → You The home country deducts its tax at source. Reclaiming it, where a treaty allows one, is your problem and nobody else's.
- Depositary bank → You The depositary converts at its own rate and charges a pass-through fee. Between the two deductions, what arrives is meaningfully smaller than what was declared.
What the receipt is not
- Depositary bank → You The ratio is set by the depositary and need not be one for one, which is why the receipt price and the home share price are rarely the same number.
Where the real shares are, and who holds themafter the trade
something deliverednot a payment
Creating the receipts
- Local custodian → Depositary bank A bank buys the real shares in the home market and lodges them with a local custodian.
- Depositary bank → You At the stated ratio. Cancelling works the same way in reverse.
Two markets, two clocks
- Local custodian → Depositary bank The shares settle where they are listed and the receipts settle where you bought them, on different cycles and in different currencies.
- Asset class
- Cash equities
- Instrument type
- Depositary receipt
- Traded
- Exchange or OTC
- Typical users
- Investors wanting foreign stocks without foreign accounts
Which risks decide the outcome
Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.
- Marketdecides it
- Creditmatters
- Liquiditymatters
- Fundingbarely applies
- Operationaldecides it
What decides it here. Market risk on the underlying share, plus an operational tail nobody prices: withholding tax, the depositary's own conversion rate and its fee all come out before the dividend reaches you.
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.
5 · Desk notesHow practitioners think about it
Now say it back
Close the page and give ADR / GDR in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — two parties wanted opposite things badly enough to write it down.
- What the contract obliges, and when — not the payoff; the obligation.
- Where the money comes from — name the source, or you have described a hope.
- What makes it lose — the ordinary way, not the dramatic one.
Put ADR / GDR beside any other instrument →
Where this instrument shows up elsewhere
- MediumWhich Desk Trades WhatPrepEleven trading seats and six that sit next to them: what each one actually touches, the single number it lives by,…
- HardRelative ValueIndustryTwo things that should cost the same and do not — a small difference, held in size, financed by somebody else