Tech analysis 101: ADR vs Stock price: Whats the difference

Follow me at @Alice Arnault and let us learn and earn together![Lovely] 

The use of ADR is very common on Tiger express and related news.

A few have expressed that they are the same as stocks but it's actually different 

When someone says an ADR has fallen, it means that the price of the American Depositary Receipt (ADR) has decreased in value on the U.S. stock exchange where it is traded. 

This decline in the ADR's price may be due to various factors, such as changes in the underlying foreign company's stock price, fluctuations in currency exchange rates, or shifts in market sentiment towards the company or its industry.

The difference between an ADR falling and a domestic stock falling is primarily related to the underlying assets they represent. 

An ADR represents shares of a foreign company, whereas a domestic stock represents shares of a company based in the same country as the stock exchange where it is traded. When an ADR's price falls, it may be influenced by factors that are unique to foreign companies or the country where the underlying company is based.

These factors can include changes in the local economy, political climate, or regulatory environment.

Additionally, since ADRs are exposed to currency risk, fluctuations in exchange rates between the U.S. dollar and the foreign company's home currency can also impact the ADR's value. For example, if the foreign currency weakens relative to the U.S. dollar, the value of the ADR might decline, even if the foreign company's stock price remains stable in its local currency.

In contrast, a domestic stock's price is more directly tied to the performance and prospects of the underlying company and the local market, without the added complexities of currency risk and international factors that can affect ADRs.

Being previously from Tencent, here is a case[Miser] 

Consider the ADR of Tencent Holdings Limited (TCEHY), a major Chinese technology company. Tencent's ADR is traded on the over-the-counter (OTC) market in the United States. Let's assume that, on a particular day, Tencent's stock price and the Chinese Yuan (CNY) to U.S. Dollar (USD) exchange rate are as follows:

Tencent's stock price in Hong Kong: HKD 500

USD/HKD exchange rate: 0.13 (1 Hong Kong Dollar equals 0.13 U.S. Dollars)

CNY/USD exchange rate: 6.5 (1 Chinese Yuan equals 0.1538 U.S. Dollars)

The ADR price for Tencent can be calculated using the stock price and the USD/HKD exchange rate:

ADR Price = Tencent Stock Price × USD/HKD Exchange Rate

ADR Price = 500 × 0.13

ADR Price = 65 USD

Now, let's say the following changes happen the next day:

Tencent's stock price in Hong Kong drops to HKD 480

The USD/HKD exchange rate remains the same at 0.13

The CNY/USD exchange rate weakens to 6.8 (1 Chinese Yuan equals 0.1471 U.S. Dollars)

The new ADR price for Tencent will be:

New ADR Price = New Tencent Stock Price × USD/HKD Exchange Rate

New ADR Price = 480 × 0.13

New ADR Price = 62.4 USD

In this example, the Tencent ADR has fallen from 65 USD to 62.4 USD due to a decrease in the underlying stock price (from HKD 500 to HKD 480).

Although the CNY/USD exchange rate also weakened, it didn't have a direct impact on the ADR price calculation because the Tencent stock price is denominated in Hong Kong Dollars, not Chinese Yuan. However, if Tencent were traded in Chinese Yuan, the weakening of the CNY/USD exchange rate would have also contributed to the decline in the ADR's value.

Does the difference in ADR affect your trading? 

Follow me @Alice Arnault and let us learn and earn together!