American depositary share (ADS)

Definition

An American depositary share (ADS) is a negotiable certificate representing ownership of shares in a foreign company, which is held by a U.S. depositary bank and traded on U.S. stock exchanges. 

What is an American depositary share?

ADSs are a form of American depositary receipts (ADRs) specifically designed for trading on U.S. markets. The primary purpose of American depositary shares is to facilitate investment in foreign companies for U.S. investors. 

ADSs allow investors to own and trade shares in foreign companies without the need to directly purchase shares on foreign stock exchanges. They are denominated in U.S. dollars and trade like domestic stocks on U.S. stock exchanges, providing liquidity and ease of access for U.S. investors.

Types of ADS programs:

• Sponsored ADSs: The company directly appoints a depositary bank to establish the ADS program, typically for the purpose of raising capital or enhancing its visibility and liquidity in the U.S. market.
• Unsponsored ADSs: Established without the involvement or cooperation of the foreign company. Third-party financial institutions create unsponsored ADSs based on the shares of the foreign company that they acquire on the open market.

Levels of ADSs:

• Level I ADSs: These are the simplest form of ADSs and are traded on the over-the-counter (OTC) market. They do not require SEC registration or full compliance with U.S. reporting standards.
• Level II ADSs: These ADSs are listed on a U.S. stock exchange and are subject to SEC registration and reporting requirements.
• Level III ADSs: These ADSs are also listed on a U.S. stock exchange and are subject to the most stringent SEC registration and reporting requirements. 

ADSs allow investors to diversify their portfolios by investing in foreign companies across different sectors and regions. Furthermore, ADSs trade on U.S. stock exchanges, providing liquidity and ease of access for U.S. investors. While ADSs offer benefits, they also come with risks, including currency risk, political risk, and the risk of fluctuations in the underlying foreign stock’s value.

Example of an American depositary share

Mary, an U.S. investor, wants to invest in a Japanese company called XYZ Corporation. Instead of directly purchasing shares on the Tokyo Stock Exchange, Mary decides to buy American depositary shares of XYZ Corporation, which are listed on the New York Stock Exchange.

Mary purchases 100 ADSs of XYZ Corporation through her U.S. brokerage account. Each ADS represents 5 shares of XYZ Corporation’s stock. Therefore, Mary effectively owns 500 shares of XYZ Corporation through the ADSs.

By investing in ADSs, Mary diversifies her portfolio with international exposure while avoiding the complexities and risks associated with directly investing in foreign stocks traded on foreign exchanges.