Trading has been a crucial and very popular method of financing for centuries. Trading has its benefits and some cons as well. However, today, trading has gained so much popularity that it is not just limited to a small level but also at a large scale level.
Now trading can be done globally, between multiple nations as well. But, when it comes to trading at this large level, there are certain boundaries, such as currencies and the value of currencies. To clear all these boundaries, 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 ADR’s case, all foreign companies, mainly India, can only rely upon the US stock market. On the other hand, in the case of GDR, all foreign countries, mainly India, could 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 the name suggests, GDR deals with global or international stock markets but not the US ones.
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 | Europe can issue GDR | 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, also abbreviated as ADR is a type of certificate that 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 trading shares also get transferred. ADR is further divided into three categories: facilitation, mediation, and arbitration.
Facilitation is the least formal method of ADR 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.
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 used.
To plan for the global depository receipt, prior permission from 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 the American Depository Receipt. On the other hand, the full form of GDR is Global Depository Receipt.
- The country of America issues ADR. In contrast, the country of Europe issues GDR.
- 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. In contrast, the currency associated with GDR is the euro.
- ADR is known to be more complicated in legal terms. 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 named under the NYSE list. Trading in GDR has access to companies named under the LSE and Euronext lists.
- The cost of ADR is high as compared to GDR. In contrast, 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 DR, is one of the most popular and 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 on the issuing side, any political or legal risks, or any exchange rate risk.
Thus, it is extremely important to understand both types of depository receipts before getting into their fundraising procedure.
References
- https://www.sciencedirect.com/science/article/pii/S0927538X06000151
- https://ideas.repec.org/p/fau/wpaper/wp092.html
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