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Accounting

American Depository Share: Definition, Examples, Vs. ADR

File Photo: American Depository Share File Photo: American Depository Share

American Depository Share: Definition, Examples, Vs. ADR

An equity share of a non-American corporation held by a depositary bank in the United States and offered for sale to investors in the United States is known as an American depositary share (ADS).

An American Depositary Receipt (ADR) is the name given to the whole issuance of shares by a foreign corporation; ADSs are the names given to the individual shares. However, the names American Depositary Shares and American Depositary Receipts are frequently used synonymously.

Learning about American Depositary Shares

An ADR is a negotiable certificate issued by a U.S. bank according to a contract with a foreign corporation. It serves as proof of ownership of ADSs, much like a stock certificate for equity shares.

ADSs are designed to make it easier to trade shares. Depending on how much the foreign firm is ready to abide by U.S. rules, they may trade over-the-counter (OTC) or on a significant exchange like the New York Stock Exchange (NYSE) or the Nasdaq (Nasdaq). The same degree of reporting as that carried out by domestic corporations is often necessary for listing on a major market, as does adherence to Generally Accepted Accounting Principles (GAAP).

ADSs’s Advantages

Foreign businesses who decide to list their stock on American markets benefit from a larger investor base, which can help reduce the cost of future funding. ADSs allow American investors to engage in international business without dealing with exchange rates or other cross-border formalities.

The Drawbacks of ADSs

Purchasing ADSs entails some currency risk. Changes in the exchange rate between the U.S. dollar and the foreign currency will impact both the price of the shares and any income payments that must be translated into U.S. dollars.

Dividends from ADSs have a separate tax treatment as well. On dividends distributed for ADRs, most nations impose a withholding amount. This deduction’s size is flexible. In the case of E.U. member states that don’t cooperate, France, Chile, and Switzerland, for instance, might withhold up to 75% of the tax on earnings. U.S. authorities already impose the dividend tax in addition to the withholding tax. By submitting Form 1116 for a foreign tax credit, ADR investors can avoid paying the dividend tax.

Examples of ADS in the Real World

Frequently, a single ADS represents many shares of ordinary stock. ADSs can also “gap” up or down when trading occurs outside U.S. trading hours when U.S. markets are closed and trading occurs in the company’s home country.

For instance, Woori Bank in South Korea, a division of Woori Financial Group, has ADSs that are traded there. On July 20, 2016, the bank’s ADS increased by a $0.03 gap. In the previous ten years, this ADS’s price has increased two-thirds of the time after a gap, according to a technical study of price movement.

Conclusion

  • Shares of foreign corporations that are held by American depositary banks and are eligible for trading in the United States, including on significant exchanges, are known as American Depositary Shares (ADS).
  • American Depositary Shares and American Depositary Receipts are phrases that are sometimes used synonymously.
  • ADSs give international businesses access to the most sophisticated financial markets and a larger pool of investors.
  • The biggest disadvantage of ADSs for investors is that there is still some curU.S.y risk while being issued in U.S. dollars.

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