A depositary receipt (DR) is a negotiable financial instrument issued by a bank to represent a foreign company's publicly traded

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

. The depositary receipt trades on a local stock exchange. Depositary receipts facilitates buying shares in foreign companies, because the shares do not have to leave the home country. Depositary receipts that are listed and traded in the United States are

American depositary receipt An American depositary receipt (ADR, and sometimes spelled ''depository'') is a negotiable security that represents securities of a foreign company and allows that company's shares to trade in the U.S. financial markets. Shares of many non-U.S ...

s (ADRs). European banks issue

European depositary receipt A European depositary receipt (EDR) represents ownership in the shares of a non-European company that trades in European financial markets. It is a European equivalent of the original American depositary receipts (ADR). The EDR is issued by a bank ...

s (EDRs), and other banks issue global depository receipts (GDRs).

How it works

A depositary receipt typically requires a company to meet a stock exchange’s specific rules before listing its stock for sale. For example, a company must transfer shares to a

brokerage A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be con ...

house in its home country. Upon receipt, the brokerage uses a

custodian Custodian may refer to: Occupations * Janitor, a person who cleans and maintains buildings * Goalkeeper, in association football * Fullback, in rugby, also called a sweeper * Legal guardian or conservator, who may be called a custodian in some ...

connected to the international stock exchange for selling the depositary receipts. This connection ensures that the shares of stock actually exist and no manipulation occurs between the foreign company and the international brokerage house. A typical ADR goes through the following steps before it is issued:How ADR Work , American Depository Receipts
Pfhub.com. Retrieved on 2013-07-14. * The issuing bank in the U.S. studies the financials of the foreign company in detail to assess the strength of its stock. * The bank buys shares of the foreign company. * The shares are grouped into packets. * Each packet is issued as an ADR through an American stock exchange. * The ADR is priced in dollars, and the dividends are paid out in dollars as well, making it as simple for an American investor to buy as the stock of a U.S.-based company.

Other forms of multi-exchange trading

DRs should not be confused with other methods that allow a company's stock to be traded in multiple exchanges, such as: * Cross-listing, where a firm lists its equity shares on one or more foreign stock exchange in addition to its domestic exchange. In this case, the two stocks are technically identical and convey the same rights. To be cross-listed, a company must thus comply with the requirements of all the stock exchanges in which it is listed, such as filing. * Dual listed companies, where two distinct companies (with separate stocks listed on different exchanges) function as one company. * ''Admitted for trading,'' where a foreign share is accessible in a different market through an exchange convention and not actually registered within that different market.

Types of DR

* Global Depositary Receipt *

Luxembourg Depositary Receipt A Luxembourg Depository Receipt (LDR) is a certificate which represents the purchase, or ownership, of foreign assets which are deposited in a Luxembourg-based account. An LDR functions in much the same way as a global depository receipt (GDR). LD ...

* Indian Depository Receipt Additionally, CREST Depositary Interests (CDIs) in the

United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the European mainland, continental mainland. It comprises England, Scotlan ...

function similarly, but not identically to depositary receipts.

References

External links

An introduction to Depositary Receipts
By Reem Heakal. ''Investopedia''. {{DEFAULTSORT:Depositary Receipt