ADRs let US investors gain exposure to foreign companies through normal US brokerage accounts, US dollars and US settlement. A depositary bank (JPMorgan, BNY Mellon, Citi, Deutsche Bank) holds the underlying ordinary shares in the company's home market and issues ADRs representing a fixed ratio against those shares (1:1, 1:5, 5:1 are common).
There are three sponsored levels and one unsponsored category. Level III ADRs are full SEC-registered listings on NYSE or Nasdaq (e.g. Alibaba, Taiwan Semiconductor, Sony) with the highest disclosure burden. Level I and II ADRs trade OTC, with Level II requiring an exchange listing application but maintaining full SEC reporting. Unsponsored ADRs are issued without issuer involvement and trade Pink with limited disclosure.
ADR holders are exposed to currency risk against the underlying-share home currency, foreign withholding tax on dividends (typically partially recoverable via the US treaty), and depositary fees (a few cents per ADR per year, deducted from dividends). Brokers handle these mechanics transparently for sponsored ADRs.