ADR and GDR: Meaning and Differences

Imagine enjoying your morning chai on your cosy couch in Mumbai while simultaneously your money reaps the benefits of income generated by an established IT giant in Silicon Valley. Doesn't it sound like a dream? Well, this dream could be true with the beauty of ADRs and GDRs. These give you access to invest in the most fascinating businesses in the world, wherever they may be located. 

Welcome to the world of global investment! In this chapter, we'll delve into the exciting realm of American Depositary Receipts (ADR) and Global Depositary Receipts (GDR), which give exposure to international markets while allowing you to diversify your portfolios.

What are ADR and GDR?

ADR and GDR are financial instruments that enable investors to trade foreign stocks in home markets. They represent shares of foreign companies but are traded on local stock exchanges, making it easier for them to buy into companies outside their country without dealing with foreign exchanges directly.

Understanding ADR (American Depositary Receipt)

An American Depositary Receipt (ADR) is a certificate issued by a US bank representing shares of a foreign company that trades on US stock exchanges. ADRs simplify the process of investing in foreign companies for investors sitting outside the US by allowing them to trade in dollars without the complexities of foreign exchanges.

Process for ADR

The process of creating ADRs involves a US bank buying shares of a foreign company and issuing ADRs in the US. market. When dividends or other corporate actions are declared, they are passed on to ADR holders by the issuing bank.

Let us understand how ADRs work with a simple example:

• Foreign Company:

Alibaba wants to tap into the US market.

• US Bank:

J.P. Morgan steps in as the "depository bank," buying Alibaba shares and holding them in a safe vault.

• ADRs:

J.P. Morgan then issues ADRs, each representing a certain number of Alibaba shares.

• You:

You waltz into your brokerage app and buy these ADRs, just like any other stock.

• Profits:

When Alibaba makes money, the value of your ADRs goes up, and you can sell them for a profit, just like any other stock.

Understanding GDR (Global Depositary Receipt)

Similarly, a Global Depositary Receipt (GDR) represents shares in foreign companies but is traded on exchanges outside the company's home country. GDRs are often listed and traded in major international financial centres such as London, Luxembourg, or Singapore.

Process for GDR

GDRs are issued by international banks and represent shares of a foreign company. These banks purchase shares of the foreign company in its home market and issue GDRs on the exchange where they are listed. Investors can buy and sell GDRs in the local currency of the exchange where they're listed.

Let us understand how GDRs work with a simple example:

• Global Company:

Nestle wants to raise capital from investors worldwide.

• Depository Banks:

Multiple banks in different countries, like HSBC in London and Deutsche Bank in Frankfurt, become "custodians," holding Nestle shares in their vaults.

• GDRs:

Each custodian bank issues GDRs representing Nestle shares in their respective markets.

• You:

You can buy GDRs on any of these international exchanges.

• Profits:

Just like with ADRs, when Nestle's stock price rises, so does the value of your GDRs, and you can sell them for a profit.

Difference between ADR and GDR

The primary difference lies in where they are traded. ADRs are traded in the US, while GDRs are traded in international markets where the company is listed. Both serve the purpose of enabling investors to access foreign companies, but the choice between ADRs and GDRs often depends on the investor's location and preference for trading markets.

Other important aspects

• Benefits of ADRs and GDRs:

ADRs and GDRs offer investors diversification opportunities, access to global markets, and the ability to invest in foreign companies without the complexities of foreign exchanges.

• Risks:

Investing in ADRs and GDRs carries risks related to currency fluctuations, political instability in foreign countries, and differences in accounting standards.

Conclusion

ADRs and GDRs are valuable tools if you are looking to diversify your portfolio globally. Understanding their differences and how they work can help you make informed decisions while navigating international markets.

Keep exploring the world of finance, and remember, with ADRs and GDRs, global investing becomes more accessible and manageable! In the next chapter, we will delve into debt, an easily available fund source for the business world.