INVESTING EXPLAINED: What you need to know about ADRs
INVESTMENT EXPLANATION: What you need to know about ARS
In this series, we break down the jargon and explain a popular investment term or topic. These are the NLRs.
Another abbreviation?
what can we say The financial services industry lives to give us ever more sets of initials and acronyms.
ADR stands for American Depositary Receipt, which is a certificate issued by a US bank representing a specified number of shares in a non-US company.
This system allows American investors to put money into foreign companies while avoiding the foreign exchange and other risks and costs of cross-border transactions.
ADRs are not shares, but they give you the right to buy the same number of shares that each certificate represents – and receive dividends.
In safe hands: The system allows US investors to put money into foreign companies while avoiding foreign exchange and other risks and costs of cross-border transactions
What is the attraction for businesses?
Companies want access to the larger capital pool and broader investor base that the US offers without the time and hassles of listing on the New York markets. For this reason, most large UK companies have ADR arrangements. Many big Chinese companies – including Alibaba, Pinduoduo and electric vehicle maker Nio – are so keen to attract US money that they too have ADRs.
The direction of these ADRs is closely watched as it is seen as an indicator of US views on Chinese economic and political conditions.
Who invented NLR?
JP Morgan, one of Wall Street’s most famous names, introduced ADRs in 1927 to allow Americans to take a stake in British department store Selfridges, which had gone public six years earlier.
Selfridges is no longer a listed company. After being owned by the Sears Group and the Weston family, it was acquired in 2021 by Central Group, which is controlled by the Thai Chirathivat family, and Austrian real estate business Signa Group.
Why are we reading this now?
Last month, Britain’s number one technology company Arm, which makes smartphone chips, went public on the Nasdaq exchange in New York rather than London.
It came as a blow to national pride – and also a disappointment to those in Britain who might have wanted to support this home-grown success story. UK investors can buy Arm ADRs, but not through Isas (individual savings accounts), where many like to hold long-term holdings with growth potential.
Why are Isas banned?
It appears because the shares represented by ADRs are not listed on a regulated exchange and therefore do not qualify for an Isa investment under HMRC rules.
This may be a bit of an annoyance, but it’s another aspect of the dispute that has resulted from Arm’s decision to favor New York over London – where the technology business is more highly valued by investors.
Shares in Arm dipped after its debut, but rallied this week in response to a series of buy recommendations from Wall Street analysts – with JP Morgan among the most enthusiastic.
Does ADR mean other things?
yes Confusingly, ADR stands for Average Daily Rate, a key metric for Airbnb that shows how much revenue a room in a property earns in a day. There’s also alternative dispute resolution, a means of resolving a dispute with a company, ex-partner or neighbor without going to court, and an adverse drug reaction.