American Depositary Share (ADS)

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The term "American Depositary Share" (ADS) refers to the shares of a foreign corporation held by a U.S. bank and traded on a U.S. stock exchange. 

An ADS carries the same privileges and rights as the underlying shares and represents a predetermined number of shares (or one share) in the foreign corporation. ADRs, the document that certifies the ownership of ADSs, are also known as American Depositary Receipts (ADRs).

ADSs give foreign businesses access to the American capital market and help them draw in American investors who might otherwise be hesitant or unable to buy foreign stocks due to a variety of obstacles, including currency exchange, cross-border settlement, or a lack of knowledge about foreign markets and regulations. By issuing ADSs, overseas businesses can broaden their shareholder base, brand recognition, and worldwide visibility.

There are different types of ADSs depending on the level of compliance with the U.S. Securities and Exchange Commission (SEC) and the listing venue. 

• Level I ADSs are the least regulated and are traded over-the-counter (OTC). They are frequently employed by foreign businesses that wish to enter the American market without raising funds.
• Level II ADSs are listed on a U.S. stock exchange, such as the New York Stock Exchange (NYSE) or Nasdaq, and have higher reporting and disclosure standards. They are used by foreign companies that want to raise capital or increase their exposure in the U.S. market. 
• Level III ADSs are also listed on a U.S. stock exchange but involve issuing new shares in addition to existing shares. They have the highest level of SEC compliance and are used by foreign companies that want to raise significant capital in the U.S. market.

A foreign firm must designate a U.S. bank as a depositary and transfer its shares to the depositary's custodian in its home nation in order to create ADSs. The depositary subsequently issues ADSs to represent the shares on an OTC market or U.S. stock exchange. Among other things, the depositary makes it easier to pay dividends, exercise voting rights, and convert ADSs into underlying shares.

The benefits of investing in ADSs for U.S. investors include:

• Diversification: ADSs allow U.S. investors to diversify their portfolios by investing in foreign companies across different sectors, regions, and markets.
• Convenience: ADSs are quoted and traded in U.S. dollars during U.S. trading hours, eliminating the need for currency conversion and time zone differences.
• Transparency: ADSs are subject to U.S. securities laws and regulations, ensuring a high level of disclosure, reporting, and corporate governance standards.
• Liquidity: ADSs are traded on major U.S. stock exchanges or OTC markets, providing ample liquidity and price discovery.

The risks of investing in ADSs for U.S. investors include:

• Currency risk: ADSs are sensitive to changes in the exchange rate between the U.S. dollar and the foreign currency of the underlying shares even though they are denominated in U.S. dollars. The value of ADSs and any income payments received from them may be impacted by this.
• Market risk: ADSs are subject to the underlying company's operating company's foreign country's economic, political, and social situations. Investors in ADS may experience volatility and uncertainty as a result.
• Tax risk: Investors in ADS may be subject to capital gains taxes on the sale of ADSs as well as withholding taxes on dividends paid by the foreign firm. Depending on the tax agreement between the United States and the foreign nation, as well as the investor's tax status, the tax treatment may change.