what is an american depositary receipt 
an american depositary receipt adr is a financial instrument non us companies use to offer their shares to american investors and raise capital in the u s market adrs allow american investors to invest in foreign companies without the complexities of dealing with foreign stock exchanges different currencies and varying trade practices 1adrs are also issued by u s depositary banks and represent a specified number of shares of a foreign company s stock although originally valued in the company s local currency dividends are paid to adr holders in u s dollars the depositary bank converts dividends into u s dollars simplifying the process for american investors there are two main types of adrs first are sponsored adrs which are officially supported by the foreign company involve a formal agreement between the company and the depositary bank and are typically listed on major u s exchanges 2 the second are unsponsored adrs that are set up without the company s direct involvement and usually trade otc 1sponsored adrs are regulated by the u s securities and exchange commission sec which can include filing financial statements using u s gaap or a reconciliation with them the benefits of adssforeign companies that offer shares on u s exchanges gain the advantage of a wider investor base which can also lower the costs of raising capital for u s investors adss offer the chance to invest in foreign companies without dealing with currency conversions and other cross border administrative hurdles the downsides of adssholding adss involves some currency risk fluctuations in the exchange rate between the u s dollar and a foreign currency can affect the price of shares and income payments which must be converted to u s dollars the tax treatment of dividends from adss is also different most countries withhold a certain amount of taxes on the dividends issued for adrs for example chile and switzerland withhold 35 while france can withhold as much as 75 of the dividend tax for noncooperative countries within the eu the withholding tax is in addition to the dividend tax already levied by u s authorities adr investors can avoid the dividend tax by filling out form 1116 for the foreign tax credit 3examples of adssa single ads often represents more than one share of common stock adss can also gap up or down outside u s trading hours when trading occurs in the company s home country and u s markets are closed for example taiwan semiconductor manufacturing company limited tsm has adss in the u s there have been times when it has gapped as illustrated in the candlestick chart in 2024 the gaps higher are represented by the green boxes while the gaps lower are represented by the red boxes tradingviewdifferences between an ads and adractual shares of the foreign companyadss are represented by adrseases u s investor access to foreign equitiesa negotiable certificateeases ads transactionssimplifies the investment process in foreign securitiesadss and adrs are closely linked financial instruments that ease the trading of shares of foreign companies on u s exchanges here are the key differences 