An American Depository Receipt (ADR) is a stock which trades in the United States (US) but represents a specified number of shares in a non-US corporation (like Infosys, etc). ADRs are bought and sold on American stock markets just like regular stocks, and are issued/sponsored in the U.S. by a bank or brokerage.
ADRs were introduced because of the difficulty in buying shares from other non-US countries which trade at different prices and currency values. U.S. banks simply purchase a large lot of shares from a foreign company, bundle the shares into groups and reissue them on either the NYSE, AMEX, or Nasdaq. The depository bank sets the ratio of U.S. ADRs per home country share. This ratio can be anything less than or greater than 1. For example, a ratio of 4:1 means that 1 each ADR share represents 4 shares in the foreign company.
The main objective of ADRs is to save individual investors money by reducing administration costs and avoiding duty on each transaction. For individuals, ADRs are an excellent way to buy shares in a non-US company and capitalize on growth potential outside North America. ADRs offer a good opportunity for capital appreciation as well as income if the company pays dividends.
Global Depository Receipt - GDR
GDR's are similiar to ADR's except that they are issued and can be traded in more than one country (globally).
When the depository bank is in the USA, the instruments are known as American Depository Receipts (ADR). European banks issue European depository receipts, and other banks issue global depository receipts (GDR).