A Closer Look at the Types of Depository Receipts

- 17 January 2022 16:56 WIB
Coinbase's stock is an example of an American depositary receipt. (Unsplash/Jeremy Bezanger) ((Unsplash/Jeremy Bezanger))
Coinbase's stock is an example of an American depositary receipt. (Unsplash/Jeremy Bezanger) ((Unsplash/Jeremy Bezanger))

JAKARTADAILY.ID – A depositary receipt (DR) is a certificate that lets investors hold shares in a foreign company listed on an international market. A DR is usually a physical certificate that allows investors to hold shares in a company listed in other countries.

Since a DR enables investors to hold shares in a company listed in a foreign country, it avoids going to a stock exchange to purchase stocks. When a company wants to set up a depositary receipt abroad, its financial advisor can help it navigate the various regulations. It also uses a domestic bank to act as a custodian and list its shares on an exchange.

There are three types of DRs. The first is the American depositary receipt (ADR) that's only available on American stock exchanges. It can only be traded in US dollars.

The second is the European depositary receipt. Its only difference from ADR is that it can only be traded in Europe and pay dividends in euros.

The last is the Global depositary receipt. Any DR that did not come from the country in which it's being traded falls under the global depositary receipt.

The advantages of DR range from diversifying their investment portfolio, helping international companies raise more capital, to enabling investors to trade international stocks without worrying over international trading policies and laws. Foreign investors still have the same rights as those granted to local investors. They may be able to vote for the company's board of directors.

However, although DR is typically less expensive than transferring stocks, it comes with higher processing fees and taxes. A DR is also more prone to volatility due to the value of its shares being affected by the foreign exchange rate between a buyer's home country and the UK.

In addition, DR cannot be listed on stock exchanges. Instead, they are only allowed to be used by institutions that execute transactions on behalf of clients.

Read more: Four Companies Plan Initial Public Offering at the Indonesian Stock Exchange this Month

Editor: Suksmajati Kumara

Source: Investopedia

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