American Depositary Receipts (ADRs) are stocks that trade in the U.S. but represent a specified number of shares in a foreign corporation – such as Alibaba (BABA). Like regular U.S stocks, ADRs are bought and sold on U.S. markets. They also trade in U.S. dollars and clear through U.S. settlement systems.
ADRs were developed because of the complexities involved in buying shares in foreign countries and the difficulties associated with trading at different prices and currency values. ADRs allow U.S. banks to purchase a bulk lot of shares from a foreign company, bundle the shares into groups and reissue them on U.S. stock markets – namely, the New York Stock Exchange and NASDAQ.