What Is an American Depositary Share (ADS)?
American Depositary Shares(ADS) are shares of foreign companies held by U.S. depositary banks and can be traded in the U.S. on major exchanges. The terms ADS and American Depositary Receipts are often used interchangeably. ADSs provide foreign companies with access to a broader investor base and the world's most advanced financial market. However, ADS investors may still face some currency risk, even though they are denominated in U.S. dollars.
Basics
In global finance, American Depositary Shares (ADSs) emerge as intriguing equity stakes in non-U.S. corporations, efficiently overseen by U.S. depositary banks, open for acquisition by American investors. Constituting a foreign corporation's complete allotment of shares, this financial instrument earns its title as an American Depositary Receipt (ADR), with individual units known as ADSs. Frequently, the designations American Depositary Shares and American Depositary Receipts find themselves employed interchangeably.
American Depositary Shares (ADS) Explained
Intricacies of ADRs
An ADR, a negotiable testament issued in partnership with a foreign corporation by a U.S. bank, embodies ownership of ADSs, resembling the role of a stock certificate in asserting equity ownership.
Simplified Trading via ADSs
ADSs, designed to streamline share trading, manifest themselves in the over-the-counter (OTC) realm or prominent stock exchanges like the New York Stock Exchange (NYSE) and the Nasdaq (Nasdaq), contingent upon the foreign entity's readiness to embrace U.S. regulatory standards. A listing on a major exchange entails compliance akin to that of domestic firms, including adherence to Generally Accepted Accounting Principles (GAAP).
Advantages of American Depositary Shares
Foreign corporations opting to list shares on U.S. exchanges experience the benefits of expanding their investor pool, concurrently reducing prospective capital expenses. Meanwhile, U.S. investors access a convenient avenue through ADSs, circumventing currency conversions and navigating intricate cross-border administrative processes when investing in international enterprises.
Downside of American Depositary Shares
Currency Exposure Owning
ADSs entail exposure to currency fluctuations. Variations in the exchange rate between the U.S. dollar and the foreign currency will impact both share prices and income payments, necessitating converting into U.S. dollars.
Diverse Dividend Taxation
The tax treatment of dividends derived from ADSs differs across countries. Most nations impose a withholding tax on ADR dividends, with rates varying. For instance, Chile and Switzerland withhold 35%, while France may withhold up to 75% for non-cooperative EU countries. This withholding tax is applied in addition to the dividend tax imposed by U.S. authorities. ADR investors can potentially mitigate the dividend tax through the completion of Form 1116 to claim foreign tax credits.
American Depositary Shares Examples
A single ADS frequently represents multiple common stock shares. Additionally, ADSs can experience price fluctuations outside U.S. trading hours when the company's home country actively trades while U.S. markets are closed.
Consider the case of Woori Bank, a subsidiary of Woori Financial Group, which lists ADSs in the U.S. On July 20, 2016, these ADSs exhibited a $0.03 upward price gap. A technical analysis of the price trend for this ADS reveals that over the past decade, it saw an increase in price approximately two-thirds of the time following such upward gaps.
Conclusion
American Depositary Shares (ADSs), also known as ADRs, bridge foreign companies with U.S. markets, offering opportunities and risks. They simplify trading but carry currency risk for investors. ADSs broaden foreign firms' investor base while making it easier for U.S. investors to access international markets. They can represent multiple shares and experience price gaps. In conclusion, ADSs are essential for global finance, with advantages and challenges for all stakeholders.