Have you ever wanted to invest in foreign blue-chip stocks, like Apple or NVIDIA in the United States, but were put off by the complex process of opening an overseas account? Or have you seen financial news mentioning “TSMC’s ADR surges” or “a certain company raises funds by issuing GDRs” and not understood what it meant? In fact, becoming a shareholder in these world-class companies doesn’t necessarily require going abroad to open an account. Through a financial instrument called a “Depositary Receipt (DR),” the barrier to investing in overseas companies has been significantly lowered.
This article will take you from the basics to a deeper understanding, explaining what Depositary Receipts are, the differences between the most common TDRs, GDRs, and ADRs, and all the advantages and potential risks you need to know before investing.
Simply put, a Depositary Receipt is a “transferable certificate” that “represents” foreign securities. This might sound a bit academic, so let’s use a more down-to-earth analogy:
Analogy: A Depositary Receipt is like a “Claim Ticket for Foreign Stocks”
Imagine you want to buy a rare fruit grown in another country, but flying over to buy it yourself is too much trouble. A trustworthy agent buys the fruit abroad, stores it in a local warehouse, and then issues a “fruit claim ticket” in your local market. By purchasing this claim ticket in your local market, you effectively own that fruit stored overseas. This claim ticket is the “Depositary Receipt,” and the fruit is the actual stock of the foreign company.
The issuance of this “claim ticket” is backed by a rigorous financial mechanism involving three key players: the issuing company, the custodian bank, and the depositary bank.
The creation of Depositary Receipts has fostered a win-win situation for both issuing companies and investors:
Depositary Receipts are named differently based on their “place of issuance.” The most common are TDRs, ADRs, and GDRs. The difference is actually very simple:
A TDR refers to a certificate issued when a company already listed abroad chooses to have a “secondary listing” on the Taiwan Stock Exchange. Investors can trade these receipts directly on the Taiwan stock market using New Taiwan Dollars.
Example: In the past, there were DRs like Du Kang-DR and Medtecs-DR.
The ADR is the most common and widely traded type of Depositary Receipt globally. It is a tool for non-U.S. companies to list and trade on U.S. stock markets (like the NYSE or NASDAQ). Many world-renowned international companies issue ADRs to attract capital from American investors.
Example: Taiwan’s “guardian,” TSMC (TSM), UMC (UMC), and China’s Alibaba (BABA) have all issued ADRs in the U.S. According to data from the Taiwan Financial Supervisory Commission Securities and Futures Bureau, American Depositary Receipts are a crucial investment tool internationally.
A GDR typically refers to a receipt that a company issues publicly in a capital market outside its home country (often in Europe, such as on the London or Luxembourg stock exchanges) and that can be traded cross-nationally. Compared to ADRs, which primarily target the U.S. market, GDRs offer more flexibility in their issuance and circulation, allowing them to be listed and traded on multiple national stock markets simultaneously, hence the name “Global” Depositary Receipt.
To give you a clearer picture, we’ve summarized the core differences in the table below:
| Comparison Item | Taiwan Depositary Receipt (TDR) | American Depositary Receipt (ADR) | Global Depositary Receipt (GDR) |
|---|---|---|---|
| Issuance & Trading Location | Taiwan | United States | Two or more global markets (often in Europe) |
| Trading Currency | New Taiwan Dollar (TWD) | U.S. Dollar (USD) | Mostly U.S. Dollar (USD) or Euro (EUR) |
| Primary Markets | Taiwan Stock Exchange (TWSE) | New York Stock Exchange (NYSE), NASDAQ | London Stock Exchange (LSE), Luxembourg Stock Exchange |
| Examples | Medtecs-DR (delisted) | TSMC (TSM), Alibaba (BABA) | Previously issued by Hon Hai, MediaTek |
Depositary Receipts open the door to global markets, but while enjoying the convenience, it’s crucial to be aware of the underlying risks. It’s like driving a high-performance sports car—you need to understand its capabilities and limits first.
The biggest benefit is “convenience.” You can use your familiar trading software, trade during your usual hours (in the case of TDRs), and use your local currency to buy shares of a company listed on the other side of the globe. This saves the hassle of researching overseas brokers, handling international wire transfers, and adapting to different trading rules.
To protect local investors, companies issuing Depositary Receipts must not only comply with their home country’s regulations but also typically meet the regulatory requirements of the issuance location, such as submitting regular financial reports and disclosing material information. This provides investors with relatively clear channels for obtaining company information.
This is the core risk of investing in Depositary Receipts. The price of a DR should theoretically move in tandem with the price of its underlying “original shares.” In practice, however, a price gap often exists between the two, which is known as a “premium or discount.”
The size of the premium or discount is influenced by multiple factors like market sentiment, capital flows, and exchange rate expectations, which can cause your investment returns to decouple from those of the original shares.
When the trading currency of the DR differs from the valuation currency of the original shares, exchange rate risk arises. For example, if you buy TSMC ADRs with U.S. dollars, but TSMC’s revenue and dividends are mainly in New Taiwan Dollars, your assets could shrink when converted back to USD if the U.S. dollar depreciates against the TWD, even if TSMC’s original share price remains unchanged.
Not all Depositary Receipts are as actively traded as TSMC’s ADR. Some less popular TDRs, in particular, may face issues of low trading volume and wide bid-ask spreads, making it difficult to buy or sell at your desired price. Furthermore, if the issuing company decides to delist or is forced to due to operational problems, investors may face the cumbersome process of being forced to sell or convert their DRs into original shares, potentially leading to losses.
In summary, Depositary Receipts are undoubtedly an excellent bridge for investors to implement a global investment strategy. They break down national borders, allowing us to participate in the growth of the world’s best companies with a much lower barrier to entry. Whether it’s Taiwan’s pride, the TSMC ADR, or other companies shining on the world stage, they have all become accessible thanks to Depositary Receipts.
However, every investment tool embodies the principle that “water can both float and sink a ship.” While enjoying their convenience, you must remain clear-headed and fully understand the underlying risks, such as premiums/discounts, exchange rates, and liquidity. Before investing, be sure to do your homework, not only researching the fundamentals of the target company but also paying attention to the trading status of its Depositary Receipt. Only then can you truly master this powerful tool and let it add value to your global asset allocation.
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Dividends are paid by the original company in its native currency to the custodian bank. The depositary bank then deducts custody fees, administrative charges, and other related expenses before converting the remaining amount into the trading currency of the DR (e.g., U.S. dollars) and finally distributing it to the investor’s account. Therefore, the dividend you receive will be slightly less than what an original shareholder gets.
Yes. In theory, investors can apply through their broker to the depositary bank to cancel their DRs and convert them back into the corresponding number of original company shares. However, this process is often complex, time-consuming, and involves a fee, so it is rarely done by individual retail investors.
TDRs: The buying process is identical to that of regular Taiwanese stocks. As long as you have a Taiwanese securities account, you can place orders directly during trading hours.
ADRs/GDRs: These overseas Depositary Receipts typically require opening a U.S. stock or overseas brokerage account (either through sub-brokerage or a direct overseas broker) to purchase. The trading rules, hours, and fees follow the regulations of the respective overseas stock markets.
The price of a Depositary Receipt is highly correlated with the price of its corresponding original shares because they represent equity in the same company. However, due to factors like different trading locations, currencies, market sentiment, and time zones, a “premium or discount” phenomenon exists between the two, meaning the prices will not be perfectly synchronized. Investors can calculate the premium/discount ratio to determine if the current price is relatively expensive or cheap.
“Trading in financial derivatives involves high risk and may result in the loss of funds. The content of this article is for informational purposes only and does not constitute any investment advice. Please make decisions carefully based on your personal financial situation. CashbackIsland assumes no responsibility for any trading derivatives.”
