DEPOSITARY RECEIPT Meaning and
Definition
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A depositary receipt, also commonly known as a depository receipt, refers to a financial instrument issued by a bank or financial institution in a domestic market, representing a specific number of shares or equity interests in a foreign company. These receipts are created to facilitate the trading of shares of foreign companies in a local stock exchange or market.
Depositary receipts provide a way for investors in one country to gain exposure to the stock of a company listed in another country, without the need to directly purchase and hold the foreign company's shares. They are essentially the equivalent of shares in a local currency, allowing investors to invest in foreign companies without worrying about foreign exchange concerns and the complexities of international investing.
There are two main types of depositary receipts - American depositary receipts (ADRs) and global depositary receipts (GDRs). ADRs are primarily issued by U.S. depositary banks and represent shares of foreign companies traded in U.S. markets. GDRs, on the other hand, are issued by non-U.S. banks and represent shares traded in other markets outside the United States, usually in Europe or Asia.
Investors who hold depositary receipts are entitled to the economic benefits of the underlying shares, such as dividends, rights issues, and capital gains. Although issued in the local market, depositary receipts are backed by the actual shares held by the depositary bank in the foreign company. They are often listed and traded like regular securities, providing investors with a convenient and accessible way to invest in foreign companies.
Etymology of DEPOSITARY RECEIPT
The term "depositary receipt" is derived from two components: "depositary" and "receipt".
- "Depositary" refers to a person or entity that receives and holds something, often in trust or for safekeeping. The word comes from the Latin word "depositarius", which means "one who receives a deposit". In the context of financial instruments, a depositary is typically a financial institution that holds securities on behalf of the entity or individual that owns them.
- "Receipt" refers to a written acknowledgment or document that proves a person has received something, usually as evidence of payment or deposit. It comes from the Old North French word "receite", which means "receipt" or "recipe". The term "receipt" itself is derived from the Latin word "recipere", meaning "to receive".
