# Understanding American Depositary Shares (ADS) vs. ADRs

> **Definition**
>
> An American depositary share is an equity stake in a non-U.S. company held by a U.S. bank that can be bought by U.S. investors.

For investors seeking exposure to foreign companies without the complexity of buying shares on international exchanges, American depositary shares (ADS) are a convenient solution. Issued by U.S. banks, these securities represent shares in a foreign company and trade on American stock exchanges like domestic stocks. They provide a way for U.S. investors to gain exposure to foreign companies without trading on international exchanges.

The acronym ADS is often used interchangeably with the one for American depositary receipts (ADRs), but ADRs refer to the physical certificates issued by the depositary bank, while ADSs represent the individual shares of the foreign company held by the depositary bank.

Investing with ADSs comes with both benefits and potential risks.

### Key Takeaways

*   American Depositary Shares (ADS) allow U.S. investors to purchase shares of foreign-based companies in U.S. dollars on American stock exchanges, offering a simpler way to access international equities.
*   There is a distinction between ADS and American Depositary Receipts (ADRs); while ADS represents the shares of the foreign company, ADRs are the certificates issued to facilitate the trading of ADS.
*   ADSs provide foreign companies access to U.S. markets, broadening their investor base and potentially lowering capital costs, despite bringing some currency risk due to exchange rate fluctuations.
*   Foreign companies can issue sponsored or unsponsored ADRs, with sponsored ones adhering to stricter U.S. regulatory standards and often being listed on major exchanges.
*   The tax implications of ADS, including dividend withholding taxes by foreign countries and additional U.S. taxes, can be complex, making it essential for investors to understand their tax obligations.

## How American Depositary Shares (ADS) Work

An ADR is a negotiable certificate issued by a U.S. bank under an agreement with a foreign company. It's evidence of ownership of ADSs, the same way a stock certificate means owning equity shares.

ADSs are meant to facilitate share trading. Foreign companies can trade ADSs over the counter ([OTC](https://www.investopedia.com/terms/o/otc-markets-group-inc.asp)) or on major exchanges like the NYSE or Nasdaq, depending on U.S. regulation compliance. Listing on a major exchange generally requires reporting at the same level as domestic companies and adherence to generally accepted accounting principles (GAAP).

## American Depositary Receipt (ADR): An Essential Tool for U.S. Investors

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](https://www.investopedia.com/terms/e/exchange.asp), different currencies, and varying trade practices.

ADRs 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. The second are unsponsored ADRs that are set up without the company's direct involvement and usually trade OTC.

Sponsored 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.

## Advantages of Investing in American Depositary Shares

Foreign companies on U.S. exchanges can reach more investors, which may reduce capital-raising costs. For U.S. investors, ADSs offer the chance to invest in foreign companies without dealing with currency [conversions](https://www.investopedia.com/terms/c/conversion.asp) and other cross-border administrative hurdles.

## Risks and Drawbacks of American Depositary Shares

Holding ADSs involves currency risk. Exchange rate changes can impact share prices and income payments, which need conversion 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. Chile and Switzerland withhold 35% of dividend tax, while France may withhold up to 75% for noncompliant EU countries. 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.

## Real-World Examples of American Depositary Shares

A single ADS may represent multiple shares of common stock. They can "[gap](https://www.investopedia.com/terms/g/gapping.asp)" up or down when the company's home country is trading, and U.S. markets are closed.

For example, Taiwan Semiconductor Manufacturing Company Limited ([TSM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=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.

![1 Year Chart of TSM Gaps](https://www.investopedia.com/thmb/cGl8qIM7xf_5CvVGO2rN0CT0DH0=/1416x0/filters:no_upscale():max_bytes(150000):strip_icc()/TSM_2024-03-07_15-40-11-c969861f708a48cb93fb04e359e131b0.png)

*1 Year Chart of TSM Gaps. — Tradingview*

## Understanding the Key Differences Between ADS and ADR  

ADS

*   Actual shares of the foreign company
    
*   ADSs are represented by ADRs
    
*   Eases U.S. investor access to foreign equities
    

ADR

*   A negotiable certificate
    
*   Eases ADS transactions
    
*   Simplifies the investment process in foreign securities
    

ADSs and ADRs are closely linked financial instruments that ease the trading of shares of foreign companies on U.S. exchanges. The critical differences are:

*   **Definition**: The ADS represents the actual shares of the foreign company held by the depositary bank. Meanwhile, the ADR is a negotiable certificate issued by a U.S. depositary bank representing a particular number of shares.
*   **Trading**: ADRs enable the trading of an ADS. Investors buy and sell ADRs on U.S. stock exchanges. The ADRs represent ownership of the ADSs, which in turn represent the foreign shares.
*   **Purpose**: An ADS permits the foreign company's stock to be traded in the U.S. and is essential for issuing ADRs.

## What Are F Shares?

"F shares" refer to shares of a foreign company that are traded on U.S. stock exchanges but not through ADRs. Instead, these shares are directly listed and denoted with an "F" at the end of their ticker symbol to indicate their foreign status.

## Is Arbitrage Trading Done With ADSs?

[Arbitrage](https://www.investopedia.com/terms/a/arbitrage.asp) in trading an ADS occurs when there are market inefficiencies, currency exchange rates, and liquidity. However, executing arbitrage strategies involves significant challenges, such as transaction costs, market risk, and the operational complexities of intra-market trading.

## What Are Depositary Banks?

Depositary banks play a crucial role in the issuance and management of ADSs, ADRs, and other related securities. These banks act as a bridge between U.S. investors and foreign companies, allowing for easier access to foreign investments. Major depositary banks include JPMorgan Chase & Co. ([JPM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=JPM)), Citigroup ([C](https://www.investopedia.com/markets/quote?tvwidgetsymbol=C)), Bank of New York Mellon ([BK](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BK)), and Deutsche Bank ([DB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=DB)).

## Conclusion: Summarizing ADS and ADR Insights

ADSs are U.S. dollar-denominated equity shares of a foreign-based company that can be bought and sold on an American stock exchange. A U.S. depositary bank issues them and they represent a specific number of shares of the foreign company. The depositary bank sets the ratio of ADSs to the underlying shares in the foreign company and allows access to foreign company stocks without the need to trade on exchanges overseas.

An ADR is a certificate issued by a U.S. depositary bank and represents a specific number of ADSs. U.S. investors benefit from ADSs and ADRs because they provide a simplified means to invest in foreign companies without engaging in complex cross-border transactions.

There are some key differences, however. ADSs are the actual shares traded, whereas ADRs serve as the certificate facilitating the trade. They come with a distinct difference in tax calculations. There's also a currency risk inherent in ADS investments due to exchange rate fluctuations that can affect share prices and income payments.  

> **Article Sources**
>
> 1.  U.S. Securities Exchange Commission. "[American Depositary Receipts](https://www.sec.gov/files/adr-bulletin.pdf)."
>     
> 2.  Reinhard Marsch-Barner, et al. "[Handbuch Börsennotierte AG: Aktien- und Kapitalmarktrecht](https://www.otto-schmidt.de/handbuch-borsennotierte-ag-9783504311803)." Verlag, 2017. Section 11.40.
>     
> 3.  Internal Revenue Service. "[Foreign Tax Credit](https://www.irs.gov/pub/irs-pdf/f1116.pdf)."
>     
> 4.  Corporate Finance Institute, "[American Depositary Shares (ADS)](https://corporatefinanceinstitute.com/resources/equities/american-depositary-shares-ads/)"
>     
> 5.  R. Dubil. "[An Arbitrage Guide to Financial Markets.](https://www.wiley.com/en-fr/An+Arbitrage+Guide+to+Financial+Markets-p-9780470853320)" John Wiley & Sons, 2020. Pages 110-111, 129-130.