A typical ADR goes through the following steps before it is issued:
The issuing bank in the US studies the financials of the foreign company in detail to assess the strength of its stock.
The bank buys shares of the foreign company.
The shares are grouped into packets.
Each packet is issued as an ADR through an American stock exchange.
The ADR is priced in dollars, and the dividends are paid out in dollars as well, making it as simple for an American investor to buy as the stock of a US based company. Today, there are thousands of ADRs in the American markets offered by leading banks like Deutsche Bank and JP Morgan.
Pricing of ADR
When an ADR is issued, it typically follows the price of the underlying foreign stock. For example, consider company A’s shares that have a current market value of $5 (after currency conversion) in the foreign country. The company issues ADRs through a bank. The bank purchases 10 million shares of the company and issues ADRs at a ratio of 5:1.
This means that every ADR is worth 5 shares of the company. Each ADR will initially be priced to reflect the prevailing share value in the home country. In this case, the ADR will be priced at $25. Subsequent price movements are influenced by demand supply forces, the condition of the foreign country’s economy, the prospects for the company and several other factors.
Next Chapter: Types of ADR