A depositary receipt is a negotiable security that is
bought and sold on a stock exchange. The receipt typically represents one or
more foreign stocks issued by international companies in their home country.
The depositary receipt allows investors to purchase an interest in foreign
companies without going through an international stock exchange. The two most
common types of these receipts are the American and Global Depositary Receipts.
The first trades on U.S. stock exchanges while the second typically trades on
the London
Stock Exchange and other international locations.
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
house in its home country. Upon receipt, the brokerage uses a custodian
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.
The
American Depositary Receipt allows investors to price foreign stocks in U.S.
dollars. This helps them determine their return on
investment through price increases and dividends from international
companies. For companies to use these properly, a U.S. financial institution
with overseas connections must be used with these receipts. A benefit from
these receipts is that it ultimately reduces the costs associated with owning
these stocks. This allows investors to avoid fees on each individual
transaction when purchasing foreign stock.
The Global
Depositary Receipt works in a similar fashion, although
an international bank holds the information for a foreign company’s stock. This
receipt also allows for investors to value their stock or dividends in either
U.S. dollars or foreign currency, depending on the location of the company
and/or international bank holding the receipt. When investors desire these
receipts be priced in euros, the document is a European Depositary receipt.
Investors can sell these receipts back to the foreign
company, a process called cross trading. This results in the U.S. broker
selling the receipts back into the foreign country’s market. From there, the
foreign brokerage house can sell the shares of stock back to the company and
transfer the money to the U.S. bank or other investors as needed. This process
also allows individuals originally from foreign countries the ability to buy
and sell shares of stock in their home country through an international stock
exchange.