A depositary receipt allows investors to access overseas shares in their own market and currency. Rather than buying an overseas share directly and facing currency issues, plus the headache of trying to buy via an overseas broker, an investor can buy an American Depository Receipt (ADR) in dollars or a Global Depository Receipt (GDR) in sterling or euros instead. This is a separate piece of paper that represents the underlying shares but is available in the investor's local currency and in their home market.
Typically, a bank will create the ADRs or GDRs by buying shares in the home market and then generating depositary receipts according to a ratio say, ten shares to one ADR.
An ADR investor then has similar rights to those of a normal shareholder. The ADR can be traded like a share and will also pay dividends, assuming the underlying company offers them.
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For more information on this topic, you can watch Tim Bennett's tutorial on how to invest in overseas companies.
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