American depositary receipts (ADRs) are shares of foreign companies that are traded on US stock exchanges. They were specifically created to give investors access to foreign stocks without the added step of dealing in foreign stock markets. They also give foreign companies exposure, and sometimes a chance, to raise capital in the US.<\/p>
When a foreign company wants to list on a US stock exchange but avoid the hassle and fees of listing, they can enter into an agreement with a US bank or an institution known as the depository. This bank works with the foreign company and its custodian bank abroad to issue ADR shares in the US stock markets.<\/p>
However, the US bank doesn\u2019t always have to have an agreement with the foreign company. The bank\u2014or another institution\u2014can issue ADRs without the foreign company\u2019s approval.<\/p>
Depending on whether the foreign company and the ADR-issuing bank have agreements, there are 2 types of ADRs:<\/p>