ADRs, Fully Explained
— How Foreign Companies List in the US
Some stocks trade on US exchanges even though the company behind them isn't actually American. That's an ADR. We cover the structure, how it differs from the ordinary shares, and what to watch for with dividends and taxes.
What Is an ADR?
An ADR (American Depositary Receipt) is a product where a US depositary bank holds a foreign company's ordinary shares locally and issues a certificate representing rights to those shares, making them tradable in dollars on a US exchange. For investors, the key advantage is being able to invest in a strong foreign company through a single US brokerage account, without needing an account at an overseas broker.
Why a Foreign Company Chooses to Set Up an ADR
For a foreign company, an ADR is a channel to access US capital markets while keeping its primary listing at home. It can draw in money from US institutional investors and index funds, and it also raises brand awareness among US consumers and business partners. For investors, conversely, the advantage is being able to diversify into strong foreign companies through the US account they already have, without opening a new overseas brokerage account or converting to a local currency.
The Relationship Between the Ordinary Shares and the ADR — the Ratio
1 ADR share isn't always equal to 1 ordinary share. The Depositary Ratio is set differently for each stock — for example, 1 ADR share might represent 2 ordinary shares, or it might represent 0.5 ordinary shares. This ratio is set at issuance to match the ordinary share's price level at the time, and it can later be adjusted (a ratio change) depending on the company's circumstances. The exact ratio needs to be checked against that stock's filings or the depositary bank's materials.
Sponsored ADR vs. Unsponsored ADR
| Sponsored ADR | Unsponsored ADR | |
|---|---|---|
| Who issues it | The foreign company enters a direct agreement with a depositary bank | A depositary bank issues it independently, without a company agreement |
| Disclosure level | Subject to SEC reporting requirements (varies by level) | Relatively lower |
| Exchange listing | Can be formally listed on the NYSE or Nasdaq | Mostly trades over-the-counter (OTC) |
Most well-known ADRs listed on a formal exchange are sponsored ADRs. Unsponsored ADRs can have lower information accessibility, so it's worth checking which type you're looking at before investing.
What to Watch For With Dividends and Taxes
ADR dividends mix together the tax law of the country where the ordinary shares are issued and the US depositary bank's fees, so the tax treatment can differ from an ordinary US company's dividend. The withholding tax rate varies by country's tax treaty, and how double taxation gets adjusted can also vary by individual situation. This article explains the general structure and is not individual tax advice — for the exact rate and how to file, please check with your broker or the National Tax Service. For the general tax structure that applies to Korean overseas investors, see the guide to saving on the 250-man-won (KRW 2,500,000) annual capital gains deduction.
ADR Levels 1, 2, and 3 — Differences in Disclosure Intensity
Sponsored ADRs are further split into levels. Level 1 only trades over-the-counter (OTC) and carries relatively light SEC periodic-reporting obligations. Level 2 can be formally listed on an exchange like the NYSE or Nasdaq, but requires additional disclosure aligned with US accounting standards. Level 3 is the highest tier, allowing the company to issue new shares (raise capital), and it comes with the strictest disclosure obligations. A higher level generally means greater information transparency, but the level itself doesn't guarantee the company's financial health.
How Currency Exchange Gets Factored In
An ADR trades in dollars, but the underlying asset (the ordinary shares) moves in the local currency. So an ADR's price is affected not just by the ordinary shares' moves in the local currency, but also by the local-currency-to-dollar exchange rate. This double currency-exposure structure is a layer of currency risk unique to ADRs, separate from the won/dollar exposure covered in how currency exchange rates affect US stock returns.