An American depository receipt is a security that represents the proportional ownership of foreign securities held in escrow by a U.S bank in the foreign country. ADRs are used to facilitae the domestic tradinng of foreign securities here in hte U.S.
Applying "ADR" to Securities Exams:
U.S based investors who wish to purchase shares of a foreign corporations such as Sony, would find it extremely difficult to make such a purchase of the foreign shares. Sony is based in Japan and its shares trade in Tokyo and are priced in Yen. To facilitate the trading of Sony, a U. S bank branch. in Japan will purchase a large amount of Sony stock and hold those shares in escrow. ADRs representing those shares will then be listed for trading here in the U.S. The ADRs will be priced in U.S. dollars and each ADR will usually represent between 1 and 10 shares of the underlying common stock.. Investors who purchase ADRs will still be subject to currency risk should the U.S dollar rise in value relative to the foreign currency.