ADRs — Foreign Stocks Listed in the U.S.
Have you ever bought stock in a Chinese or European company in dollars on the U.S. market? That's an ADR. The original stock is abroad—so how does it get traded in the U.S.?
What is an ADR
An ADR (American Depositary Receipt) is a certificate issued by a U.S. depositary bank that represents the rights to a foreign company's stock, which the bank holds on your behalf. Simply put, it's a 'receipt that packages a foreign stock the American way.'
Thanks to this, an investor can buy and sell foreign-company stock on a U.S. exchange or in the over-the-counter (OTC) market, in U.S. dollars, while reading English-language disclosures. Since you don't need to open an account directly on a foreign exchange, accessibility improves greatly.
How many shares of the underlying (local) stock one ADR represents differs by stock. One ADR may equal several shares, or less than one share.
Sponsored vs. unsponsored
ADRs are divided into two types by how they're issued.
Sponsored: created jointly by the foreign company (the issuer) and the depositary bank. The issuer bears part of the cost and cooperates with disclosures.
Unsponsored: created independently by the depositary bank without the issuer's participation. Holders tend to bear the related costs, and they usually trade only OTC.
Multiple unsponsored ADRs can exist for the same company, so their information transparency can be lower than sponsored ones.
The difference between Levels 1, 2, and 3
Sponsored ADRs are divided into three levels by listing level and disclosure obligation.
Level 1: trades only OTC. Cannot raise new capital. It's the lightest step for creating a 'trading presence' in the U.S. market, with the lowest disclosure requirements.
Level 2: can list on a national exchange like the NYSE or Nasdaq. But it cannot raise new capital. SEC registration and annual-reporting obligations attach.
Level 3: in addition to exchange listing, it can even raise capital through a new public offering. The requirements are the strictest.
To sum up, Levels 2 and 3 trade on national exchanges, while unsponsored and Level 1 trade mainly OTC.
The higher the level, the tighter the disclosure and the higher the information reliability—but that in itself does not guarantee a rise in the share price.
Risks to check when buying an ADR
Exchange-rate risk: the underlying stock trades in a foreign currency while the ADR trades in dollars. So even if the local share price stays the same, when the exchange rate moves, the ADR price and dividends change. For Korean investors, the 'won-dollar' exchange rate is added on top, so the FX effect is layered on twice.
Costs: a depositary fee may be deducted from dividends or charged separately, and foreign dividends carry local withholding tax.
Liquidity: Level 1 or unsponsored ADRs have low trading volume, so it may be hard to buy and sell at your desired price.
よくある質問
Q. If I buy an ADR, do I also receive dividends?
Yes. The depositary bank receives the dividends from the underlying stock, converts them to dollars, and pays them to ADR holders. But local withholding tax and depositary fees may be deducted, so the amount you actually pocket may be less than the headline dividend. The won-converted dividend also changes with exchange-rate movements.
Q. Which is more advantageous, an ADR or the underlying (local) stock?
There's no single answer. An ADR offers good accessibility with dollar trading and English disclosures but comes with a depositary fee and liquidity differences, while the underlying stock requires access to the local market but has none of those intermediary costs. Either way, exchange-rate risk cannot be avoided. You need to weigh your own trading convenience and costs together.
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