What an American Depositary Share (ADS) is — short definition
– An American depositary share (ADS) is a U.S.-dollar–denominated security, issued by a U.S. depositary bank, that represents ownership of one or more ordinary shares of a company domiciled outside the United States. ADSs trade in U.S. markets just like domestic stocks.
How ADSs relate to American Depositary Receipts (ADRs)
– An American depositary receipt (ADR) is the negotiable certificate issued by the depositary bank that evidences ownership of ADSs. In practice people often use “ADS” and “ADR” interchangeably, but technically the ADR is the certificate and the ADS is the share that trades.
How ADSs are created and who runs them
– A U.S. depositary bank (for example, large custodial banks such as BNY Mellon, JPMorgan, Citigroup, or Deutsche Bank) holds the foreign company’s shares in custody and issues ADSs in the U.S. market according to a set conversion ratio (e.g., one ADS = 2 foreign shares). The depositary bank handles dividend conversion into U.S. dollars, recordkeeping, and communication between U.S. holders and the foreign company.
Types of ADRs/ADSs
– Sponsored ADR/ADS: the foreign company has an agreement with the depositary bank and usually provides financial reporting. Sponsored programs are more likely to be listed on major exchanges and to comply with U.S. disclosure requirements.
– Unsponsored ADR/ADS: established by a depositary bank without the direct cooperation of the foreign company; these typically trade over‑the‑counter (OTC) and may have less consistent disclosure.
Why investors use ADSs (main benefits)
– Access: buy foreign company exposure inside U.S. brokerage accounts without opening foreign exchange accounts.
– Simpler settlement and currency handling: dividends and trades are settled in U.S. dollars.
– Exchange listing options: some ADSs are listed on major venues (NYSE, Nasdaq) and subject to comparable listing standards and reporting requirements.
– Familiar trading mechanics: receive quotes in USD, use standard order types, and see compliance-level filings for many sponsored programs.
Key drawbacks and risks
– Currency risk: ADS prices and dividend payments reflect both the foreign company’s local share price and movements in the local currency versus USD.
– Withholding taxes: the foreign jurisdiction may withhold a portion of dividends before the depositary bank pays you in USD. Withholding rates vary by country and treaty status.
– Fees and servicing charges: depositary banks may retain fees or charges (check the ADR/ADS prospectus).
– Potential limited voting rights: ADR holders may have reduced or delayed voting participation relative to direct shareholders.
– Liquidity and spread: some ADSs (especially unsponsored OTC ones) can be thinly traded.
– Trading gaps: the underlying local market can move when U.S. markets are closed, creating price gaps when U.S. trading resumes.
“F shares” — a brief note
– “F shares” are foreign company shares listed directly on a U.S. exchange without being represented by an ADR certificate. These tickers often have an “F” appended to indicate foreign listing; the mechanics and regulatory treatment differ from ADR/ADS programs.
Arbitrage and ADSs
– In theory, price differences between an ADS and the underlying foreign shares can allow arbitrage. In practice, transaction costs, exchange-rate execution, settlement frictions, and limited liquidity make such strategies complex and risky for most retail traders.
What to check before buying an ADS — short checklist
1. Sponsor & depositary bank: name of the depositary bank (e.g., BNY Mellon, JPMorgan) and whether the ADR is sponsored.
2. Listing venue: major exchange (NYSE/Nasdaq) or OTC.
3. ADS-to-share ratio: how many foreign shares each ADS represents.
4. Ticker and CUSIP/ISIN: correct identifiers for trade and settlement.
5. Disclosure & filings: whether the company files required reports with the SEC (if listed).
6. Dividend policy & withholding tax rate: expected foreign withholding and how dividends are converted to USD.
7. Fees: any custody or administrative fees charged by the depositary bank.
8. Liquidity & spreads: average daily volume and typical bid–ask spread.
9. Voting rights & timing: how and when ADR holders can vote, if at all.
10. Currency exposure & market hours: consider FX risk and the possibility of gaps from home-market moves.
Small worked example — dividend and conversion math
Assumptions:
– ADS ratio: 1 ADS = 5 foreign shares.
– Company pays 2.00 units of foreign currency (FC) per ordinary share as a dividend.
– Exchange rate: 1 FC = 0.25 USD.
– Foreign withholding tax: 15% on dividends.
Step-by-step:
1. Dividend per ADS in foreign currency = 5 shares × 2.00 FC = 10.00 FC.
2. Withholding applied by country = 15% × 10.00 FC = 1.50 FC withheld.
3. Net dividend after withholding = 10.00 − 1.50 = 8.50 FC.
4. Convert to USD = 8.50 FC × 0.25 USD/FC = 2.125 USD.
Result: each ADS holder receives about $2.13 (rounded) on that dividend event, before any depositary bank fees or U.S. taxes. If a U.S. investor expects to offset foreign withholding via the U.S. foreign tax credit, they would typically use IRS Form 1116 (consult a tax advisor).
Practical steps to find ADS/ADR details
– Look up the company’s ADR prospectus or the depositary bank’s program page for the deposit agreement, ADS ratio, fees and withholding policy.
– Check the exchange listing page or SEC filings for the sponsor’s financial reports and disclosure level.
– Confirm ticker, average volume, and spreads in your brokerage platform.
Bottom line (concise)
– ADSs let U.S. investors buy shares of foreign companies through U.S. markets with settlement and pricing in U.S. dollars. They simplify many operational headaches of cross‑border investing, but introduce FX exposure, possible withholding taxes, fees, and sometimes lower liquidity. Read the ADR/ADS deposit agreement and prospectus, confirm the conversion ratio and tax implications, and factor these into your research.
Further reading and authoritative sources
– Investopedia — American Depositary Shares (ADS): https://www.investopedia.com/terms/a/ads.asp
– U.S. Securities and Exchange Commission (SEC) — American Depositary Receipts (ADRs): https://www.sec.gov/fast-answers/answersadrhtm.html
– BNY Mellon — Depositary Receipts (overview and services): https://www.bnymellon.com
– Nasdaq — What is an ADR?: https://www.nasdaq.com/articles/what-is-an-adr-american-depositary-receipt-2017-09-08
Educational disclaimer
This explanation is for educational purposes only and is not personalized investment, tax, or legal advice. Rules and tax rates vary by country and can change; consult a qualified financial or tax professional before making investment decisions.