Depositary receipts are tradeable financial securities that represent shares in a non-U.S. company. Depositary receipts are separate instruments from the underlying shares and they can trade on stock exchanges independently from the underlying securities.

American depositary receipts (ADRs) refer to depositary receipts that were issued in the United States. Depositary receipts that were issued in other countries are referred to as global depositary receipts (GDRs). In the United States, ADRs can trade both on national exchanges and over-the-counter (OTC) markets. Historically, GDRs traded mostly in London or Luxembourg. In recent years the geographic footprint has expanded as more countries’ stock exchanges allow GDRs to be listed and traded. The below discussion will focus on ADRs.

ADRs are attractive to investors because they provide an opportunity to hold shares of foreign companies while trading on a U.S. stock exchange in U.S. dollars. They also attractive to foreign companies, providing them with a means of raising money from the U.S. capital markets. However, the liquidity and trading volume of ADRs can vary widely.

ADRs are negotiable financial instruments issued by banks or trust companies. A depositary agreement is entered into between the non-U.S. company and the bank in order for the non-U.S. company to trade its ADRs on a U.S. stock exchange. The bank or trust company agrees to act as the ADR depositary in exchange for earning fees related to the trading of the ADRs. For example, the issuing financial institution will convert any dividend payments into U.S. dollars for U.S. investors.

In order to trade on a U.S. stock exchange, the foreign company must register its ADRs with the U.S. Securities and Exchange Commission (SEC). As a result, ADRs are subject to certain SEC disclosure requirements such as filing quarterly reports and they must follow U.S. accounting standards in their disclosures. ADRs are registered with the SEC on a Form F-6 registration statement. Among other things, the Form F-6 requires disclosure of the contractual terms of the depositary agreement.

An ADR may represent the underlying shares of the foreign company on a one-for-one basis. However, an ADR can also represent a fractional share or multiple shares of the underlying foreign company.

The foreign company must be involved in the issuance of the ADRs in order for the ADRs to be listed on a major U.S. stock exchange. If ADRs are issued as unsponsored, or without the involvement of the underlying foreign company, they can only trade on the OTC markets.

If an ADR for a particular foreign company is not available for trading, it may be possible to trade the foreign company’s stock in the OTC markets. This is referred to as trading “foreign ordinaries.” However, securities trading on the OTC markets are subject to less regulations and disclosure obligations, which may create heightened risks from investors. In addition, it may be possible for a U.S. investor to buy shares of a foreign company on an international stock exchange through a broker. For example, most Canadian stocks that trade on the Toronto Stock Exchange can be traded by U.S. investors through major brokerage firms.