Depositary receipt
Rules, protection and tax below are for European Union (baseline).
What it is
A bank buys shares of a foreign company, holds them, and issues receipts on the local exchange that represent those shares. You trade the receipt like any local share, in local currency, through your usual broker. Americans know them as ADRs, Brazilians as BDRs, Argentines as CEDEARs.
The receipt tracks the foreign share price converted into local currency, so currency risk is built in even though you never touched a foreign account. The bank takes a small yearly fee and passes dividends through, usually after foreign withholding tax.
In countries with capital controls, receipts are often the only legal way for ordinary people to own foreign companies, which is why they matter so much in Argentina and Brazil.
How it works
- A depositary bank holds the underlying foreign shares and issues receipts, each representing a set number of shares.
- You buy and sell receipts on your local exchange in local currency.
- The price follows the foreign share price times the exchange rate, minus small frictions.
- Dividends are converted and paid to you after foreign tax and the bank's fee.
The honest pros and cons
For
- Foreign companies without a foreign account, in your own currency and tax system.
- Often the only route past capital controls.
- Traded during your own market hours through your usual broker.
Against
- Currency risk is fully present; a falling foreign currency lowers the receipt's price.
- The depositary fee and conversion costs make it slightly worse than owning the share directly.
- Receipts for smaller companies can be thinly traded, with wide spreads.
- In controlled markets the receipt price can drift from the foreign share price.
Getting it in European Union (baseline)
not researchedWherever you are
- Check the ratio: one receipt may equal one share, ten shares or a tenth of one.
- Compare the receipt's volume and spread with the underlying share; thin receipts are costly to trade.
- Note the depositary fee, usually a few cents per receipt a year, deducted from dividends.
Go deeper
Also called
ADRs, BDRs, CEDEARs, GDRs, depositary shares
Often confused with
- Foreign shares: Part ownership of a company listed in another country; currency moves affect your return too.
- Stock index ETF: A fund traded on an exchange that copies a stock market index at low cost.