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American Depositary Receipt

An American Depositary Receipt (ADR) is a security issued by a U.S. bank that represents ownership of shares in a foreign company. ADRs enable U.S. investors to invest in foreign companies without the need to trade on foreign exchanges or deal with foreign currency transactions.

When a foreign company decides to issue an ADR, it works with a U.S. bank to establish a sponsored or unsponsored ADR program. A sponsored ADR program means the foreign company is directly involved in the process and the ADRs are issued in their name. An unsponsored ADR program means the foreign company is not directly involved, and the ADRs are issued by a third party, usually a broker-dealer.

Each ADR represents a certain number of underlying shares in the foreign company. The ratio of ADRs to underlying shares is determined by the issuing bank and the foreign company. ADRs are traded on U.S. exchanges just like any other U.S.-listed stock, and their prices are quoted in U.S. dollars.

Investors who hold ADRs receive dividends in U.S. dollars, and the ADRs can be bought and sold just like any other U.S. stock. ADRs are subject to the same risks as any other stock, including market risk, currency risk, and geopolitical risk.

 

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