How an American Depositary Share (ADS) Works

An American Depositary Share, or ADS, is a US dollar-denominated share of a foreign-based firm that you and other people can purchase on a US stock exchange. American depositary banks, also known as custodian banks, issue the shares in accordance with an arrangement with the foreign issuing business. You can call the entire issuance an American Depositary Receipt (ADR), while you can call individual shares ADSs. Today, people tend to use the two names interchangeably, implying that they have the same meaning.

The US custodian bank holds the foreign shares' corporate and economic rights, according to the requirements of the American Depositary Share certificate. If you own a foreign company, you can have the company's shares listed over-the-counter (OTC) or on a major exchange such as the New York Stock Exchange or Nasdaq, depending on its compliance with US securities legislation. OTC sales demand less reporting. To be traded on the major stock markets, your foreign company must conform to the same degree of reporting as domestic corporations, which must follow Generally Accepted Accounting Principles (GAAP) regulations.

International firms that choose to list their shares on US exchanges benefit from larger investor opportunities, which may trigger lower future capital expenses. ADSs enable US investors to engage in international companies without dealing with currency conversions or other cross-border administrative obstacles. Often, a single ADS represents many shares of ordinary stock. Additionally, American Depositary Shares can "gap" upwards or downwards outside US trading hours when trading occurs in the company's country of origin.

Example of American Depositary Share (ADS)

Example 1

Imagine you own and operate ABC Foods in India, and you are looking to expand your business in the United States of America. Once a depositary bank in the United States holds your firm's equity share, those shares become accessible for purchase by US investors. As the owner and operator of ABC Foods, you now have a chance to leverage a wider investor base.

Example 2

Diageo is a United Kingdom-based alcoholic beverage firm. It has been attempting to grow its market in the United States. It trades its stocks on the New York Stock Exchange under the ticker name DEO. One Diageo American Depositary Share is equivalent to four Diageo ordinary shares. As of 2018, Diageo's dividend yield is approximately 3%.

Example 3

Siemens is a German-based energy conglomerate. Even though Siemens has grown to become Europe's largest manufacturing firm, it went further to become a global leader in automation, electrification, and digital transformation. In May 2014, Siemens made its way out of the New York Stock Exchange. It maintains a Level I American Depositary Share program and trades over-the-counter in the United States. In US dollars, two Siemens ADRs equal one Siemens ordinary share. Siemens' dividend yield is approximately 3.4 percent as of 2018.