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An ADR (American Depositary Receipt) is not a share, but a certificate. This means that ADRs are subject to different tax and legal principles. This form of investment is particularly important for Chinese companies.
ADR – American Depositary Receipt: A definition
When you buy an ADR, you are not purchasing a share. Rather, it is a certificate that entitles you to buy a share.
- This changes the tax treatment of the investment. While a share itself represents a tangible asset, an ADR is considered a financial product. This means that the rights and obligations associated with purchasing shares are no longer relevant.
- This entails risks for investors. On the one hand, an ADR is tied to the issuing bank or stock exchange and can become worthless in the event of bankruptcy. Furthermore, expropriation or restructuring of an ADR is more easily possible.
- In extreme cases, you may end up with a worthless ADR because the associated company changes the rules for ownership of the certificate.
- As a rule, there is a separate certificate for each share. In addition, you can often only buy either one share or one ADR of a company.
Buying and selling ADRs
ADRs facilitate American investment in foreign securities.
- This is achieved by the fact that, unlike shares, ADRs can be traded in America without a full approval process.
- ADRs also allow investors to buy into companies from which they would otherwise be unable to obtain shares due to certain circumstances.
- In some countries, for example, foreigners are not allowed to buy securities from companies in certain industries. In order to still obtain foreign investment money, the companies concerned issue ADRs.
- Investors can buy ADRs on the NYSE (New York Stock Exchange) and thus acquire a right to the shares. ADRs are traded exclusively in US dollars.
Why Chinese companies prefer ADRs to shares
ADRs are of particular interest to Chinese companies. We explain why.
- Some industries in China are prohibited from financing themselves through foreign investments. This includes the internet industry, for example.
- This allows the Chinese government to maintain control over companies. In particular, this concerns the possibility of censoring published content.
- At the same time, capital from abroad is needed to enable these companies to grow.
- ADRs are traded on the financial market like American stocks, and anyone can purchase them. That is why many Chinese companies rely on ADRs. These include Alibaba, Baidu, and JD, for example.
