Trading has been a crucial and very popular method when it comes to financing for centuries. Trading has its benefits and some cons as well. However, in today’s time, trading has gained so much popularity that it is not just limited to a small level, but also at a large scale level.
Summary
Now trading can be done globally, between multiple nations as well. But, when it comes to trading at this large level, there are certain boundations, such as currencies, and the value of currencies. To clear all these boundations, different methods of trading are used. The two of the most used trading methods are ADR and GDR.
ADR vs GDR
The main difference between ADR and GDR is that in the case of ADR, all of the foreign companies, majorly India, can only rely upon the US stock market. While on the other hand, in the case of GDR, all of the foreign countries, majorly India, can trade in the stock market of any country apart from the US stock market.
ADR stands for American Depository Receipt. As suggested by the name, ADR is issued in the country of America and it only deals with the US stock market.
GDR stands for Global Depository Receipt. As suggested by the name, GDR deals with global or international stock markets but not the US stock market.
Comparison Table Between ADR and GDR
| Parameters of comparison | ADR | GDR |
| Full form | ADR stands for American Depository Receipt | GDR stands for Global Depository Receipt |
| Issued by | ADR can be issued by America | GDR can be issued by Europe |
| Issued in | ADR can be issued in the United States domestic capital market | GDR can be issued in the European capital market |
| Deals in | ADR deals in the US stock market | GDR deals in the international stock market (apart from the US stock market) |
| Market associated | ADR is associated with the retail investor market | GDR is associated with the institutional market |
| Currency associated | US dollar | Euro |
| Complexity | ADR is more complex in legal terms as compared to GDR | GDR is less complex in legal terms as compared to ADR |
| Access to | ADR has access to companies that are named under NYSE list | GDR has access to companies that are named under LSE list and Euronext list |
| Cost | ADR is more costly as compared to GDR | GDR is less costly as compared to ADR |
| Negotiation | Negotiation for ADR can be done only in America. | Negotiation for GDR can be done all around the world. |
What is ADR?
American Depository Receipt or also abbreviated as ADR is a type of certificate which is negotiable only in the country of America and is associated with the currency of the US dollar. ADR represents the trading of a foreign company or a foreign organization in the stock market of the United States.
Through ADR, US investors can also invest in non-US companies as well. With the transfer of ADR, all the underlying shares of trading also get transferred. ADR is further divided into three different categories, that are facilitation, mediation, and lastly arbitration.
Facilitation is the least formal method of ADR as compared to the rest of the two types. Mediation is a more formal method as compared to facilitation. Arbitration is the most formal method among the rest of the two types.
What is GDR?
Global Depository Receipt, also abbreviated as GDR, is also a negotiable certificate through which investors can trade into the stock markets of several different countries apart from the US stock market.
Though most of the globally known companies belong to America, and thus they use the method of ADR to raise funds for trading. But for the rest of the companies which are also globally known, for their need of funds for trading, GDR is the method that is used.
To plan for the global depository receipt, prior permission by the ministry of finance and the foreign investment promotion board, also known as FIBP is required.
Main Differences Between ADR and GDR
- The full form of ADR is American Depository Receipt. While on the other hand, the full form of GDR is Global Depository Receipt.
- ADR is issued by the country of America. Whereas, GDR is issued by the country of Europe.
- ADR is issued in the United States domestic capital market. On the other side, GDR is issued in the European capital market.
- ADR deals in the US stock market. GDR deals in the international stock market but apart from the US stock market.
- The market associated with ADR is the retail investor market. The market associated with GDR is the institutional market.
- The currency associated with ADR is the US dollar. Whereas the currency associated with GDR is euro.
- ADR is known to be more complicated in legal terms. While on the other hand, GDR is known to be less complicated as compared to ADR in legal terms.
- Trading in ADR has access to companies that are named under the NYSE list. Trading in GDR has access to companies that are named under the LSE list and Euronext list.
- The cost of ADR is high as compared to GDR. Whereas the cost of GDR is less as compared to ADR.
- Negotiation of ADR can be done in the country of America only. Negotiation of the GDR can be done all over the world.
Conclusion
Depository Receipt or also abbreviated as DR is one of the most popular and one of the most convenient ways for any company to raise funds for trading. Though both the methods of depository receipt (DR), that is, American Depository Receipt (ADR) and Global Depository Receipt (GDR) have their benefits, they are certain risks as well.
Some of the major risks in ADR and GDR could be the low inflation risk of the company which is on the issuing side, any political or legal risks, or any sort of exchange rate risk.
Thus, it gets extremely important to understand both the type of depository receipt before getting into their procedure of raising funds.