American depository receipts (ADRs) are certificates issued by a U.S. bank or brokerage firm, representing foreign shares held by the institution. One ADR may represent one share, a portion of a foreign share, or a bundle of shares of a foreign corporation. Arbitrage. the simultaneous buying and selling of like securities in different markets to take advantage of slight price differences, keeps the prices of ADRs and underlying foreign shares essentially equal.

Most ADRs are sponsored, meaning the corporation provides financial information and other assistance to the institution and may subsidize the administration of the ADRs. Institutions sponsoring ADRs act as custodian for the company issuing the stock and handle dividend payout, notifications, and processing. Depository receipts are registered with the securities and exchange commission and trade like any other U.S. security in national exchanges or over-the-counter markets. Generally the foreign company approaches the institution requesting sponsorship. Unsponsored ADRs are issued by one or more depository institutions in response to market demand but do not receive assistance from the corporation.

The U.S. financial market is the largest in the world. By selling shares of stock in their companies through ADRs, foreign corporations raise capital in U.S. markets for their business operations. In the year 2000, trading in ADRs exceeded $1 trillion for the first time. Ericson (Sweden), Nokia (Finland), Vodafone (United Kingdom), BP Amoco (United Kingdom), and Telephonos de Mexico were the highest-volume ADRs traded. During the year, 182 new ADR programs were established by companies from 38 countries, dominated by companies from the United Kingdom, Germany, and Hong Kong.

For investors, ADRs offer a low-cost opportunity to diversify their portfolios. Until the creation of ADRs, it was difficult for individual investors to purchase stocks of foreign companies. But ADRs are subject to a variety of risks: currency risk; the potential for decline in value as a countrys currency declines in foreign exchange markets; political risk, the potential for violence or default of a government; and economic risk, the potential for decline in the foreign companys home economy.

Further reading

ADR Trading Tops The $1 Trillion Mark For the First Time, Wall Street Journal, 2 January 2001, p. C10.