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Penny Stock Basics

Depositary Receipt (DR): What It Is, Types, and Advantages

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Written by Timothy Sykes
Updated 3/5/2021 12 min read

What the heck is a depository receipt? Good question … It’s not very different from ordinary shares.

They can even present exciting new trading or investing opportunities…

Like all trading and investing, they come with risks. But once you understand them, you can potentially use them to your advantage.

In this post, I’ll discuss ADRs, depositary receipt types (like sponsored depositary receipts), and some advantages of depositary receipts.

Let’s do this!

What’s a Depositary Receipt?

A depository receipt (DR) is a transferable certificate that represents shares of a foreign company.

It’s a way to own shares of a foreign company without having to trade on a foreign market or deal with foreign currency.

They used to be an actual paper certificate, similar to a contract. Now they’re traded on the major exchanges or OTC markets, just like regular shares.

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How Does a Depositary Receipt Work?

If a company wants to be listed on a U.S. exchange, it must meet the requirements of the exchange where it wants to list.

It has to be a publicly traded company in its country of origin or it has to go through the process of an initial public offering (IPO).

DRs can be issued on the major exchanges or on the OTC markets. I’ll get into how that’s determined later…

The issuing of DRs works like this…

A brokerage house, located in the same country as the issuing company, purchases stock of the company from the exchange. The brokerage house then transfers the shares to a custodial bank to hold the shares.

The bank acts as an agent between the two countries to make sure the shares exist and there’s no fraud.

The shares are then delivered to a U.S. bank. (Or whichever country will be selling the DRs.) The shares are then packaged up as DRs.

One DR can represent a partial, one, or multiple shares of the original company. The U.S. bank determines the price of the DRs based on the exchange rate and the price at which the company trades in its country of origin.

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Types of Depositary Receipts

There are different depositary receipt types, depending on the country issuing the foreign stock … Let’s get into it!

American Depositary Receipts (ADRs)

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American Depositary Receipts are available to U.S. investors on all three of the major U.S. exchanges or on the OTC markets. It’s how American investors purchase foreign companies on local exchanges.

They’re the most common type of depositary receipt. They’ve been available to American investors since the 1920s.

An ADR is either sponsored or unsponsored…

Sponsored depositary receipts have different levels of sponsorship — levels one, two, and three. There are also restricted programs, but I won’t get into those because they’re not publicly traded.

Level 1 is the lowest level and it’s also the most popular. These require the least amount of reporting by the company and results in the ADRs trading on the OTC markets.

A level 2 ADR requires the company to meet more Securities and Exchange Commission (SEC) disclosure requirements. (If you want to learn how to read these complicated documents, get my DVD, “Read SEC Filings.”)

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If the company meets the requirement and files the required forms regularly, it can be listed on any of the major exchanges.

A level 3 ADR is the highest level. The company has to meet strict requirements, the same as American listed companies. This is because companies that set up a level 3 program can issue new shares into U.S. markets, in addition to its DRs.

Non-Sponsored ADR

Unsponsored ADRs are listed on the OTC markets. They’re shares that are issued without the company having an agreement with a depositary bank. Unsponsored DRs can be issued by multiple banks based on market demand.

These are pretty shady to buy or trade because the company has no knowledge or interest in the company’s shares being sold in a different market. Holders of unsponsored ADRs also have no voting rights.

When ADRs are sponsored, at least the company is doing it to improve the company’s exposure, and it’s willing to provide at least minimal information about the company.

Personally, I never trust penny stock companies. Expect the worst and you’ll never be disappointed … And if you’re going to trade them, focus on your education first.

European Depositary Receipts (EDRs)

European depositary shares are the opposite of American depositary shares. They’re shares of American companies that want access to foreign markets, like the London Stock Exchange.

The American company would enter a depositary receipt agreement with a London bank. The bank would then sell the company’s shares on the London Stock Exchange and convert the price from U.S. dollars to euros.

Global Depositary Receipts (GDRs)

A global depositary receipt is similar to an ADR or EDR but it’s a broader term.

A company can choose to issue its shares to multiple countries. It’s not restricted to only selling in one foreign country. If the company wants money raised from the sale of shares in Euros then it’s called an EDR.

What Are the Advantages of Depositary Receipts

Depository receipts are cheaper and more convenient than trading in foreign markets. There’s no need for foreign currency or having to deal with exchange rates.

They also allow investors to diversify their portfolios. It gives investors access to companies in different markets and economies.  They’re traded in U.S. dollars and trade the same as ordinary shares would.

They’re also great for the company issuing them. It gives them exposure to global markets and a bigger pool of investors.

As a trader, they can open up more opportunities. The stocks will still move based on news and economic changes in the company’s home country. So you might find an edge there…

I trade anywhere there’s an opportunity. Don’t limit yourself to a small number of stocks. Be willing to try new things until you find your niche.

A lot of people don’t want to trade OTC stocks because they’re so sketchy. That’s exactly why I like them. Because the big Wall Street players don’t trade them. I don’t have to compete against hedge funds and algorithms.

I think they have cleaner charts and aren’t as choppy as stocks on the major exchanges.  That’s why I think they’re so great for beginners with small accounts.

You have to find what works for you and trade whatever fits your patterns and strategy.

The Disadvantages of Depositary Receipts

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Some disadvantages of depositary receipts for a trader are the possibilities of exchange fees on dividends or having to pay double taxes.

Investors can also be exposed to any economic booms or busts in the foreign company. You might need to do some extra research on the country before buying in. Make sure the country is economically and politically stable.

Depositary receipts are only available for a limited number of companies. You won’t have access to all foreign companies.

Also, beware of the lower level sponsored ADRs and unsponsored ADRs that can be a bit riskier.

Since I don’t invest and hold stocks long term, that doesn’t really apply to me. I’m used to trading sketchy OTC stocks. That’s why I’m in and out of stocks fast. I don’t want to be exposed to risk for too long and I always cut losses quickly!

If you want to learn how I trade penny stocks, start with my no-cost penny stock guide. Then, get in my 30-Day Bootcamp.

It’s a month’s worth of lessons with daily assignments and homework. You can work at your own pace and repeat it as often as you like. Bonus: It comes with “The Complete Penny Stock Course” book and my “Pennystocking Framework” DVD.

Depositary Receipts vs. Common Stock

Depositary shares represent shares in a foreign company, so how do they differ from owning common stock of the company?

There isn’t much of a difference. Once the DRs are trading on the local exchange, they’re treated and traded just like regular shares would be.

In some instances, as part of an IPO, a company might make DRs convertible into common stock. But for the most part, they remain separate.

Should You Buy Depositary Receipts?

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If you’re into investing, DRs can potentially be a good way to access foreign companies. It can open you up to new opportunities.

That said, I don’t invest — I day trade.

I get in and out of stocks quickly. And I trade anything that fits my strategy and patterns. I like stocks with a big percent gain for the day, a catalyst, and high volume.

If a DR matched my criteria, I’d probably trade it. I trade all kinds of sketchy companies on the OTC markets.

For me, it’s all about sticking to my rules, minimizing my risk by cutting losses quickly, and never believing any of the hype about a company. I did that once and lost $500,000 of my own money.

Read about my loss in my book, “An American Hedge Fund.” (Get a no-cost downloadable version here.)

Now I don’t trust any of them. I trade the ticker and the price action, not the company. Then I move on to the next opportunity.


Whether you trade or invest, there are always risks. DRs are no exception. And with all the market volatility we’ve seen this year, there’s no way to know which way the markets will go from day to day.

That’s why it’s important to trade or invest with rules. These are my rules.

If you have the discipline and dedication to your education, apply for my Trading Challenge.

You’ll get access to all my DVDs, video lessons, weekly live trading and Q&A webinars with me and my top students, and my Challenge chat room.

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Start learning what it takes to be successful in any market, apply today!

Have you traded depositary receipts? Let me know in the comments … I love to hear from my readers! 

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”