Definition:

An American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares—often one share—of a foreign company's stock. ADRs are traded on U.S. stock exchanges.

Formula:

There is no specific formula for ADRs, as they are financial instruments rather than a calculable metric.

ADRs allow U.S. investors to invest in foreign companies without dealing with foreign stock exchanges. They provide a way to diversify portfolios internationally while trading in U.S. dollars and under U.S. regulatory standards.

Limitations:

ADRs may involve currency risk, as the underlying foreign shares are subject to exchange rate fluctuations. Additionally, there may be differences in accounting standards and financial disclosures between the U.S. and the foreign country.

Summary:

ADRs are financial instruments that allow U.S. investors to invest in foreign companies through U.S. exchanges, providing a convenient way to diversify internationally. While they offer benefits like trading in U.S. dollars and compliance with U.S. regulations, they also come with risks such as currency fluctuations and differing accounting standards. ADRs are versatile across industries with international reach but are less applicable to domestically-focused sectors.