Access routes: ADRs and GDRs, local listings, trading hours, custody and the practical limits at German brokers

What you will learn

• How American and global depositary receipts work: ratio, depositary fee, sponsored versus unsponsored, levels.
• Where a German private investor can actually trade emerging-market shares and what is usually not possible.
• How to calculate the fair value of a depositary receipt and detect a premium or discount.
• Custody details that matter when something goes wrong.

Explanation

Owning an emerging-market company means choosing one of four doors: a depositary receipt in New York or London, the home-market listing, a secondary listing in euros on a German exchange, or a fund. Exchanges in general were covered in "Stocks & Fundamental Analysis" (lesson 2).

Depositary receipts

An American depositary receipt (ADR) is a certificate issued by a US bank (the depositary) that represents a fixed number of a foreign company's shares held in custody in the home market; it trades in US dollars like a normal US share. A global depositary receipt (GDR) is the same idea listed outside the USA, most often in London or Luxembourg. Key terms:

• Ratio. One receipt can represent several shares (1:5), one share (1:1) or a fraction (10:1).
• Sponsored receipts are created with the company's cooperation; unsponsored receipts are created by a bank alone, trade over the counter and often have thin liquidity.
• Levels. Level I trades over the counter; Level II is exchange-listed with full reporting; Level III also raises capital in the USA.
• Depositary fee. A pass-through fee, typically a few US cents per receipt per year, deducted from dividends or debited by your broker.
• Fungibility. Receipts can normally be converted into the underlying shares and back for a fee. Where conversion is restricted, for example by capital controls, the receipt can trade at a lasting premium or discount to the home share.

Home-market listings

Buying in the home market gives you the real share, the deepest liquidity and the home-market price, but needs a broker with access to that exchange, local settlement, foreign currency and sometimes a local tax identification. Asian markets trade during the German night, South American markets in the German afternoon and evening; an order placed outside hours waits for the opening auction, where the price can differ a lot.

Secondary listings in euros

Many foreign shares trade in euros on Frankfurt, Tradegate, gettex or Stuttgart against a German market maker's inventory. You get euro settlement and German hours, but the price is derived from the home market plus the exchange rate, the spread widens when the home market is closed, and liquidity can vanish in stressed moments.

What German brokers usually allow

Most German online brokers offer US-listed ADRs, German secondary listings and UCITS funds. Direct access to Shanghai, Mumbai, Taipei, Seoul or São Paulo is not available at most German retail brokers; a few international brokers offer some of them with extra fees. US-domiciled ETFs are generally not purchasable by EU private investors because they lack the required EU key information document. Check your broker's current list.

Custody

Your broker holds foreign shares through a chain of sub-custodians ending in the home-market depository; the shares are segregated client assets in Germany, but further down the chain you depend on foreign law. Corporate actions reach you late or not at all, and dividends arrive after foreign withholding tax (covered in "Dividend & Income Investing").

Worked example

Hypothetical example: a Taiwanese company (invented numbers) has an ADR with a ratio of 1:5, so one ADR represents five shares. Home share price 200 Taiwan dollars (TWD), exchange rate 32 TWD per US dollar, ADR price $34.00.

Step 1, theoretical ADR value = 5 × 200 ÷ 32 = $31.25.

Step 2, premium = 34.00 ÷ 31.25 − 1 = +8.8 %. Lasting premiums appear when conversion into local shares is restricted, so arbitrage cannot close the gap.

Step 3, dividend through the ADR: 12 TWD per share, so 60 TWD per ADR = 60 ÷ 32 = $1.875. With a hypothetical 20 % withholding tax and a $0.02 depositary fee: net = 1.875 × 0.80 − 0.02 = $1.48. Net yield on the ADR price: 1.48 ÷ 34 = 4.4 %.

Step 4, a €5,000 order, taking the full spread as round-trip cost: German secondary listing with a 0.60 % spread = €30; home market with a 0.10 % spread plus a €10 foreign-market fee = €15. Cheaper, but only if your broker offers it. Excluded: commissions, currency conversion, taxes.

Common mistake

Practice activity

On paper: an Indian company's ADR has a ratio of 1:2. The home share trades at 1,500 Indian rupees (INR), the exchange rate is 85 INR per dollar, and the ADR trades at $38.00. (a) Calculate the theoretical ADR value and the premium or discount. (b) The company pays 30 INR per share; with a hypothetical 20 % withholding tax and a $0.03 depositary fee, what do you receive per ADR? (c) Name one reason why the gap in (a) might persist.

Key takeaways

• A depositary receipt is a claim on shares held by a bank; check the ratio, sponsorship level, depositary fee and whether conversion is restricted.
• Theoretical receipt value = ratio × home price ÷ exchange rate; a persistent premium or discount signals a restriction, not a bargain.
• German secondary listings are convenient but their spreads widen when the home market is closed; direct home-market access is rare at German retail brokers.

Next step

The next lesson applies these access questions to the most complex emerging market: China, with its A, H and ADR share classes, Stock Connect and VIE structures.