Depository receipts are derivative securities that are issued by an international buyer or borrower by utilizing the services of a domestic trustee. The security is issued through the auspices of a depository bank, which in turn purchases shares of international companies on behalf of the account owner. There are two commonly employed forms of the depository receipt: the Global Depository Receipt and the American Depository Receipt.
Known as a GDR, the Global Depository Receipt is essentially a certificate issued by the depository bank. The certificate entitles the purchase of shares of stock issued by international companies that are not headquartered in the same country as the borrower. This approach makes it possible to invest in a wide range of companies, especially in emerging markets. GDRs are usually traded on the London Stock Exchange, with a single GDR usually representing in the range of ten shares of stock.
American Depository Receipts or ADRs function in a similar manner, in that an account is established with a depository bank and it is possible to engage in trading using the ADR. However, the process remains fully based in United States dollars, both in purchasing and selling any shares connected with the receipt. This approach makes it possible for investors in the United States to engage in trading that involves international companies without the need to go through any type of cross-border transaction.
The American Depository Receipt may represent multiple shares of stock, a single share, or even a percentage of a single share of stock. In most cases, the purchase price of the international shares will be very close to the current trading price in the country of origin, while allowing a slight adjustment for the current ratio of foreign shares to that of the ADR. Any shares that are covered by the terms of the ADR are known as American depository shares.
Depository receipt structures have been around for decades. In the case of the ADR, the first appearance of this form of depository receipt took place in 1927 and was established by JP Morgan of the United States on behalf of Selfridges and Company, a retail corporation based in the United Kingdom.