Introduction

American Depository Receipt, also abbreviated as the ADR, can be thought of as an exposure that lets investors outside and inside of the United States interact with one another. Investing in a foreign company is hard, given the complexities and schedules of stock market. American depository receipt saves you from that torture and provides an easy way of building assets in the United States even if you don’t belong from there. They have a hand in the establishment of numerous notable companies that are still running successfully. We can say that this negotiable security was specifically designed for chaos-free foreign investments. An economic definition says that the American Depository Receipt represents insurance of a foreign company and lets the shares of that company be invested in the United States. It is a negotiable security. Shares of such foreign companies are invested and traded as normal stock exchanges in the country.

This negotiable security called American Depository Receipt is used as an instrument for foreign exchanges. A bank or a broker is the issuing body for an American Depository Receipt. Whichever company trades by using an American Depository Receipt, the security would represent a fixed number of shares in the bank of the United States for investment purposes. The ratio of shares a company buys in the form of American Depository Receipt would vary from company to company but the number of shares an American Depository Receipt represents stays the same for all of them. It acts like a domestic share but the trade happens on international scale.

How do they Work?

The American Depository Receipt works like a domestic share that is trading on international level. Number of shares bought by a company via American Depository Receipt are recorded in the financial record of the institution offering them. The foreign companies are saved from the trouble of not being able to trade in their own currencies. They trade via American Depository Receipts and the investment occurs in dollars. Taking care of these payments and amounts is the job of United States Settlements units.

To make this process work, a bank first asks the company to provide it with complete detailed information so it can run the process smoothly. Then, the bank purchases shares of the company in that foreign currency and issues American Depository Receipts after holding the stocks, according to the requirement.

Types of the American Depository Receipts

We can classify American depository receipts into two categories:

• The first is called as the sponsored American depository receipt. Under this process, the foreign company making the investments makes a contract with the United States depositary Bank. The bank is then responsible to sell those shares in the market as a trade. All the necessary jobs are under the bank’s responsibility. For example, selling shares and keeping record of all transactions, distribution of shares in the market as well as issuing the dividends and distributing them.

• The other category is called non-sponsored American depository receipt. No shares are issued by the foreign company in this type. Contracts are made between different brokers and such agreements do not require to be registered. Initially, the dealers had to fulfil a few requirements and there was a proper application process but after certain amendments, these requirements were eradicated from the process by the security and exchange commission.

Levels of the American Depository Receipts

We can further divide the sponsored American depository receipts into three levels. These levels are made on the basis of how much access the trading foreign company has to the marketplace.

• The lowest is the Level I. This is the point where sponsored American depository receipts are issued to the foreign company. There is no need to report everything and list all securities. Whenever the company is ready to sell the shares, level I upgrades to level II.

• The security and exchange commission has special requirements for level II American depository receipts. The foreign company is establishing a trading relationship with the United States, it is required to register itself properly.

• Level III is the highest one a foreign company can achieve. At this level, the company can ask for an increase in assets during trading.

Conclusion

American depositary receipt creates an easy way for companies to trade and invest in the United States using their own currency. Termination or cancellation of the contract can happen at any time during the whole trading process.