Stock market 101: The ins and outs of ADRs

Julie Brownlee, Fsp Invest, 20 Aug. 2014

Tags: adrs, adr, american depository receipts, what are adrs, who issues adrs, south african companies and adrs

If you’ve researched companies to invest in on the Johannesburg Stock Exchange (JSE), you may have come across ADRs.

So what exactly are ADRs? Who issues ADRs? And why would shares on the JSE have ADRs?

Let’s take a closer look…

What are ADRs?

ADRs are American Depository Receipts. They trade on US stock exchanges, such as the New York Stock Exchange.

The purpose of ADRs is to allow American investors to buy shares in foreign companies, such as a company listed in South Africa.

Even though the focus of ADRs is for American investors, any foreign investor can by ADRs through a US stock exchange if their stockbroker facilitates the process.

Who issues ADRs?

US banks issue ADRs. One ADR can represent one or more than one share in a foreign company.

The banks holds the underlying foreign share, which backs the ADR.

As American banks issue them, they’re dollar-based. This means an American investor would receive any dividend payments in dollars. And if they sell their ADR, they get any capital gain also in dollars.

Because ADRs are denominated in dollars, it means there is an exchange rate risk. The issuing bank will convert the foreign currency dividends and share price for the American investor.

For example, if an American investor buys an ADR in a South African company, the dollar could weaken or strengthen against the rand. This will impact the return the investor receives.

Why South African companies have ADRs

ADRs are a great way for a South African company with no listing in the US to attract American investors.

One South African company with ADRs is Naspers.

There are also Global Depository Receipts (GDRs). These work in a very similar way to ADRs, but they don’t trade exclusively in the US.

So there you have it, the ins and outs of ADRs.

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