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Definition of American Depositary Share (ADS)
An American Depositary Share ("ADS") is a U.S. dollar denominated form of equity ownership in a non-U.S. company. It represents the foreign shares of the company held on deposit by a custodian bank in the companyıs home country and carries the corporate and economic rights of the foreign shares, subject to the terms specified on the ADR certificate.
An American Depositary Receipt ("ADR") is a physical certificate evidencing ownership in one or several ADSs. The terms ADR and ADS are often used interchangeably.
ADRs provide U.S. investors with a convenient way to invest in non-U.S. securities without having to worry about the complex details of cross-border transactions; they offer the same economic benefits enjoyed by the domestic shareholders of the non-U.S. company. ADRs are issued by a U.S. bank, such as J.P. Morgan, that functions as a depositary. Each ADR is backed by a specific number or fraction of shares in the non-U.S. company. The relationship between the number of ADRs and the number for foreign shares is typically referred to as the ADR ratio.
ADRs can be listed on any of the U.S. exchanges, such as the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX), and may be quoted for trading on the National Association of Securities Dealers Automated Quotation System (Nasdaq), the NASD's over-the-counter market, or the pink sheets. They can also be privately placed and traded as Rule 144A securities. Finally, the concept of the ADR has been extended to other geographical markets, resulting in structures known as global depositary receipts (GDRs), international depositary receipts (IDRs), and European depositary receipts (EDRs), which are generally traded or listed in one or more international markets.
Although ADRs are U.S. dollar denominated securities and pay dividends in U.S. dollars, they do not eliminate the currency risk associated with an investment in a non-U.S. company.
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