Taiwan's Beginner's Guide to Investing in US Stocks: How to Choose a Custodial Account?

Why Are More and More People Choosing Sub-brokerage for U.S. Stock Investments?

In recent years, Taiwanese investors’ interest in overseas stock markets, especially the U.S. stock market, has continued to grow. To enter the U.S. stock investment field, investors face an important choice: should they open an overseas brokerage account themselves, or use domestic broker’s sub-brokerage services? For most beginners, sub-brokerage (Sub-brokerage) offers a relatively safe entry point.

The essence of sub-brokerage is simple: you do not deal directly with overseas brokers but entrust a domestic broker to place orders on your behalf. Investors open an account with a domestic broker qualified for overseas securities sub-brokerage. After receiving your order instructions, the broker transmits them to a registered partner broker in the overseas market for actual trading. Because the order goes through a “second layer” of delegation before reaching the overseas market, it is called “sub-brokerage.”

Core Advantages and Limitations of Sub-brokerage

Why choose sub-brokerage? The three main practical reasons are:

First, fund transfer is more convenient. You can settle in TWD directly, without handling USD currency exchange or cross-border transfers yourself. Dividends are also directly remitted to your Taiwanese bank account, and tax matters are handled by dedicated professionals at the broker, saving administrative hassle.

Second, more reassuring psychologically. Since the service is provided by a licensed domestic broker, safety and legal protections are clearer. Although your stocks are nominally held in an overseas custody account by the broker, this is a common practice in international markets, fully legal and widespread.

Third, no need to understand English interfaces. All operations, customer service, and troubleshooting can be done in Chinese.

However, sub-brokerage also has obvious costs: The fee structure is complex, and the total cost is significantly higher than directly using an overseas broker. Additionally, the range of investable products is limited (mainly stocks, ETFs, bonds), with no margin trading or short selling, and no automatic dividend reinvestment mechanisms. More importantly, sub-brokerage uses limit orders; you must specify a price in advance and cannot trade at the current market price.

Conclusion: Sub-brokerage is most suitable for investors with large capital, low trading frequency, and long-term holding plans. If you are an active trader or have a small amount of capital, other options may be more cost-effective.

How Does Sub-brokerage Work? Four Steps to Understand the Entire Process

Although it seems complex, the operation logic of sub-brokerage is clear:

Step 1: Placing Orders
You input your order instructions (stock code, quantity, limit price) via the domestic broker’s app or website. This occurs in Taiwan time, completely independent of U.S. market hours.

Step 2: Transmitting Orders
Your order enters the broker’s system and is forwarded to a registered partner broker in the U.S. market. These partner brokers have the authority to execute trades directly on U.S. exchanges.

Step 3: Execution and Reporting
The overseas partner broker finds counterparties in the U.S. market and completes the trade. The execution results are sent back to the Taiwanese broker and then synchronized to your account page.

Step 4: Settlement and Custody
After execution, the stocks are transferred into the broker’s overseas custody account. Legally, these stocks are held by the broker, but you enjoy full benefits such as dividends and voting rights. This “broker nominee” model is standard in the industry.

A special note on in-transit funds: after selling stocks, the proceeds are not immediately in your account but are in an “in-transit” state. The good news is, in-transit funds can be used immediately to buy new stocks in the same market and currency. In simple terms, “sell first, buy later without waiting,” which helps in flexible portfolio adjustments. However, if you want to withdraw cash, you must wait for the official settlement (T+3 for U.S. stocks).

Cost Structure of Sub-brokerage, More Complex Than You Think

The costs of sub-brokerage are not limited to commissions. Investors need to bear:

Local broker fees:

• Order commission: Domestic brokers charge about 0.1% to 1% of the transaction amount, mostly around 0.5%. There is usually a minimum fee, typically between USD 25-50. Some brokers (e.g., Cathay Securities) have announced no minimum fee, which is advantageous for small investors.

Overseas exchange and U.S. regulatory fees:

• SEC fee: 0.00278% of the transaction amount when selling U.S. stocks.
• Transaction Activity Fee (TAF): USD 0.000119 per share, with a maximum of USD 5.95 per trade, charged on sales.
• Exchange fees: Vary by exchange, generally around 0.00565% for both buy and sell.

Tax and currency exchange costs:

• Dividend withholding tax: 30% withholding at source; tax refund is possible but cumbersome.
• Overseas income tax: Only applicable if annual income exceeds TWD 6.7 million and the basic tax exceeds the regular income tax. The basic tax is calculated as (basic income – 6.7 million) × 20%.
• Exchange rate spread: Sub-brokerage uses a fixed broker rate, which may differ from the spot exchange rate, creating an implicit cost.

Bank-related fees:

When conducting cross-border remittances on the same day, some banks (e.g., Taishin Bank) waive fees, but most banks require investors to bear the costs themselves.

Eight Key Rules You Must Know About Sub-brokerage Trading

1. Only limit orders, no market orders: You must set a buy or sell price in advance; the system will seek opportunities in the market. You cannot enjoy the convenience of “immediate market price execution.”

2. Insufficient account balance causes failure: If your pre-deposited funds are insufficient, your order can be placed but will not be executed.

3. Pre-deposited funds are usually over-locked: To account for exchange rate fluctuations, brokers freeze slightly more than the actual transaction amount. After execution, the excess is refunded, which is how in-transit funds work.

4. Most can day trade, but no margin trading or short selling: Sub-brokerage prohibits borrowing money to buy stocks or short selling.

5. Brokers do not observe holidays, but banks’ forex departments may: Sub-brokerage operations follow international market hours, open year-round. However, if banks’ forex departments are closed, foreign currency transfers are affected.

6. Be aware of time differences for U.S. trading hours: U.S. market hours are 09:30 am to 4:00 pm EST, corresponding to 21:30 to 04:00 Taiwan summer time, and 22:30 to 05:00 winter time.

7. Exchange rate has a fixed spread: Sub-brokerage uses a unified broker rate, not the interbank rate, which is an implicit cost.

8. Clearing schedule is T+2, but funds are settled T+1 and T+3: Buying stocks deducts funds on T+1; selling stocks settle on T+3. The market settlement itself is T+2.

How to Open a Sub-brokerage Account? Practical Guide

Before opening a sub-brokerage account, confirm you meet the basic conditions: being a Taiwanese individual aged 18 or above.

Required documents:

• Original copies of dual IDs: ID card plus passport or residence permit
• Second ID: health insurance card, driver’s license, etc.
• Seal/stamp: needed for signing documents in person
• Bank account proof: to demonstrate fund capacity

Account opening process:

Choose one of two methods. In-person at a domestic broker branch, or online via the broker’s official website.

When opening, inform the staff or system of the broker code and select the settlement currency (TWD or USD). Settling in TWD is more beginner-friendly, avoiding currency exchange costs.

After successful account opening, transfer funds into the sub-brokerage settlement account. The funds and stocks are fully held by the broker, which is one reason why the risk is relatively controllable.

Major Domestic Sub-brokerage Broker Fee Comparison

Below are the main domestic brokers’ electronic order commissions for U.S. stocks:

Frankly speaking: The fee differences among brokers are small, and there is room for negotiation. However, costs are still higher than using overseas brokers directly. Currently, Cathay Securities, which has no minimum fee, is most friendly for small investors.

Note that total costs consist of two parts: the domestic broker’s fee and the fees charged by overseas exchanges and brokers. When buying U.S. stocks, fees are relatively low, but for Chinese mainland stocks or Hong Kong stocks, rates can soar to 1% or even 2%.

Besides Sub-brokerage, What Other Ways Are There to Invest in U.S. Stocks?

Option 1: Direct trading through overseas brokers
Open an account with a U.S.-based broker, such as well-known firms, to trade stocks, futures, options, ETFs, and U.S. bonds. Commissions are often free, with only exchange fees involved. The downside is higher account opening barriers and mostly English interfaces.

Option 2: U.S. Stock CFDs (Contracts for Difference)
CFDs are similar to U.S. stock futures, allowing two-way trading with leverage, supporting long and short positions. They have very low fees (0.01-0.015%) and no commissions, only spread and overnight fees. Especially suitable for high-frequency traders or leveraged operations.

Option 3: Combining multiple methods
Investors can flexibly combine sub-brokerage, overseas brokers, and CFDs based on their needs. For example, use sub-brokerage for long-term holdings and CFDs for short-term speculation, creating a complementary strategy.

Common Terms in Sub-brokerage Trading Quick Reference

ETF (Exchange-Traded Fund)
A basket of stocks packaged into a fund that tracks a specific index. For example, some Taiwanese funds track the FANNG group and major Chinese tech giants, adjusting weights periodically to follow the sector.

“Lot” and stock units
Trading units. Hong Kong stocks are measured in “lots,” with each lot varying from hundreds to tens of thousands of shares; mainland China standardizes at 100 shares per lot; U.S. stocks are traded per share. Transactions must be in whole lots.

In-transit funds
Funds that have been settled but not yet delivered. The key advantage is that in-transit funds can be immediately used for new trades in the same market and currency. In other words, you can sell first and buy later without waiting, which is helpful for flexible portfolio management. But to withdraw cash, you must wait for official settlement.

Making a Choice: Is Sub-brokerage Suitable for You?

Sub-brokerage is suitable for:
Investors with low trading frequency, large single investments, and long-term holding preferences. It offers a safe and convenient experience but at a higher cost.

When to consider other methods:
If you plan frequent trading, have small capital, or need leverage, using overseas brokers or CFDs will be more cost-effective and flexible.

Final advice:
Beginners might start with sub-brokerage to build investment habits and market understanding. As trading frequency increases or capital grows, consider migrating to overseas brokers. This approach reduces initial risk and leaves room for future upgrades.