Definition
American Depositary Shares (ADS) are equity shares of a non-U.S. company that are available for purchase on an American stock exchange. They represent the foreign shares of the company and carry the rights of the foreign shares, except for voting rights. ADS are issued by banks in the U.S under agreement with the company concerned.
Key Takeaways
- American Depositary Shares (ADSs) are a way for individuals in the U.S to effectively own foreign shares without dealing with the complexities of different currencies and foreign regulations. This makes it easier for investors to invest in foreign companies.
- ADSs are issued by U.S depository banks, reflecting a specific number of shares in a foreign company on which they represent. They carry the same rights as the underlying shares, such as voting rights and dividends, which are payable in US dollars.
- American Depositary Shares come with additional administrative fees that are charged by the depositary bank and can be traded on U.S. stock exchanges, just like regular shares. Thus, they help foreign companies access investors in the U.S. market.
Importance
American Depositary Shares (ADS) are important in the financial world as they allow U.S. investors to invest in foreign companies without dealing with the complexities of foreign markets.
By representing ownership in shares of a non-U.S. company, ADS provide the investors access to global companies and diversify their portfolios across various economies, while still trading on U.S.
stock exchanges and benefiting from the transparent regulations, investor protections, and other advantages of U.S. financial markets.
This opens up more investment opportunities and helps in risk reduction through geographical diversification. Furthermore, in addition to making it easier for American investors to invest in foreign companies, they can also make it easier for foreign companies to raise capital in America.
Explanation
American Depositary Shares (ADSs) serve a crucial function in the global financial market as they allow investors in the United States to invest in foreign companies without the complications of dealing with foreign markets and currencies. Essentially, they are a way for U.S investors to own shares in foreign companies that do not necessarily trade on U.S exchanges. ADSs are created when a foreign company decides to involve U.S investors in their firm.
They sell their ordinary shares or equity to a U.S depository bank which in turn issues American Depositary Shares on the U.S exchange market. This assists in improving the portfolio diversification of U.S investors by giving them access to foreign equity. ADSs also offer a convenient and cost-effective method for companies to raise capital from foreign markets.
For foreign companies, this is an advantageous tool to expand their visibility and brand recognition in the U.S market. This could also lead to increases in their global and home market liquidity. So, American Depositary Shares are a win-win instrument benefiting both U.S investors who want a piece of foreign equity, and non-U.S companies who wish to tap into the vast U.S financial market.
Examples of American Depositary Shares
Alibaba Group Holding Ltd. (BABA): An e-commerce company based in China, Alibaba listed its shares with the New York Stock Exchange (NYSE) in 2014 using American Depositary Shares. This was the largest initial public offering (IPO) in history, raising $25 billion.
British Petroleum (BP): BP is a multinational oil and gas company based in the UK. It is one of the world’s seven oil and gas “super majors.” The company issues American Depositary Shares in the U.S., which trade on the NYSE.
Toyota Motor Corporation (TM): Toyota, a Japanese multinational automotive manufacturer, also makes use of American Depositary Shares. These shares trade on the NYSE and enable U.S. investors to invest in the company without having to go through the complications of investing directly in a foreign stock exchange.
American Depositary Shares FAQ
Q1. What are American Depositary Shares?
American Depositary Shares (ADS) are shares of non-U.S. companies, which are available for purchase on an American stock exchange. Essentially, they are a way for non-U.S. companies to be listed on a U.S. exchange and offer their shares to American investors. They represent the foreign shares of the company and are issued by a U.S. depository bank.
Q2. How do American Depositary Shares work?
American Depositary Shares are issued by a U.S. bank that purchases shares from a foreign company and then issues shares of the ADS, which can be bought and sold by American investors. Each ADS represents a specific number of shares in the foreign company. The bank holds the shares of the company and issues the ADS to the investor, who has all the rights of a regular shareholder.
Q3. What are the benefits of American Depositary Shares?
There are several benefits to investing in ADS. For investors, ADS offer a convenient way to invest in foreign companies without the need for cross-border or cross-currency transactions. For foreign companies, offering ADS can attract American investors and raise capital in the U.S.
Q4. Are there any risks associated with investing in American Depositary Shares?
As with any investment, there are risks associated with investing in ADS. These include changes in exchange rates, and political and economic instability in the foreign company’s home country. Moreover, while the U.S. bank holds the shares, the company’s records may not be as accessible or transparent as those of a U.S. company.
Q5. How does one buy and sell American Depositary Shares?
ADS can be bought and sold like any other U.S. security, through a brokerage account. The price of the ADS will fluctuate similarly to how a regular share’s price fluctuates on the exchange. Investors can buy and sell at market price, or use limit orders to control the price of their transactions.
Related Entrepreneurship Terms
- American Depositary Receipts (ADR)
- Foreign Equity
- Depositary Bank
- Exchange Rate
- Securities and Exchange Commission (SEC)
Sources for More Information
- Investopedia: Comprehensive resource for definitions, explanations, and examples of financial terms including American Depositary Shares.
- U.S. Securities and Exchange Commission: The regulatory body for U.S. financial markets offering official information and guidelines on matters like American Depositary Shares.
- New York Stock Exchange (NYSE): Offers official statistics and information on listed securities, including American Depositary Shares.
- NASDAQ: Another major stock exchange that provides listings information, news, and educational content relating to financial securities including American Depositary Shares.
