• Maureen Decker

Fractional Share Investing

A new way of looking at investing is taking the financial world by storm. Investors are starting to think about how much money they can afford to spend rather than how many shares they can afford to buy. Purchasing a piece of Apple or Facebook once meant determining how many shares you could afford, but now investors primarily focus on how many dollars they are willing to put into the market.


This way of thinking is gaining speed thanks to the global adoption of fractional trading, which allows investors to purchase slivers of traditional shares rather than having to purchase an entire share. This shift in investor thought, as well as a push to eliminate trading fees, has made it easier (and cheaper) for investors to investment as little as $1. Nearly all firms are adopting this method of trading, from new online brokers to traditional brick and mortar firms. Fidelity Investments implemented their own fractional trading platform, Stocks by the Slice, in early 2020. Since its foundation, 75% of buy trades from investors using the service were in dollars on average. Last month Fidelity said that number is now closer to 85%. Charles Schwab Corporation started a fractional-trading program in June called “Stock Slices” that had nearly 190,000 accounts as of December. Fractional trading isn’t a new phenomenon; however, the ability to trade partial shares during market hours is.


Trading platforms such as Robinhood have also been responsible for this shift. A FinTech company founded in 2013, Robinhood provides investors with commission-free trades of stocks and exchange traded funds. Its free app currently has 13 million users. Investors can make trades on this platform at a minimum of $1, and the most commonly traded amount on their recurring investment feature, which allows trades in dollars, is $10. This recurring investment option allows users to put a pre-determined amount of money toward specific investments on a weekly or monthly basis. The company stated that this feature was designed for users who aren’t day traders and instead wanted an option that allowed them to build investing into their financial lives. This feature gives those who are unfamiliar with investing an opportunity to dip their toes in the water.


Younger investors in particular have driven this shift, explaining why platforms such as Robinhood have created features that are targeting novice investors. The median age of Robinhood users is 31. Proponents of this mindset believe that it makes investing more accessible to everyone. Investors with just a few dollars to spare can now enter the market and purchase whatever fraction of shares they may choose.


Critics, however, have argued that the ease of investing may unintentionally encourage risky behavior and could end with individuals losing money. Thinking in dollars may cause new investors to distance themselves from their investments and inhibit their understanding of the market.


Regardless of your stance, this shift in the investor mindset (and, consequently, the financial world as a whole) is here to stay. Scott Ignall, head of Fidelity’s retail brokerage business, believes this trend will only continue. He stated that in the future “retail investors will be thinking 100% in dollars, not shares”.


Source: https://www.wsj.com/articles/when-some-investors-look-at-stocks-they-see-dollars-not-shares-11610706630


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