Perhaps you have at some point toyed with the idea of buying cult stocks like Amazon Inc. (NASDAQ:AMZN), Booking Holdings Inc. (NASDAQ:BKNG) or even Berkshire Hathaway Inc.(NYSE:BRK.A) but quickly changed your mind when you checked out their price tags. Not that many people have an extra $1,900 lying around for a single Amazon stock.
Many investors who aspire to own stock in aristocrats like Berkshire Hathaway-- whose shares currently go for $340,210 a pop--are put off by their hefty share prices and are consequently forced to turn to unit trusts or mutual funds just to gain some exposure.
Thankfully, the days of whining about the stock markets being thoroughly undemocratic might finally be over.
There’s a lot of buzz going on about the recent trend of companies allowing traders and investors to buy teeny tiny fractions of shares in their favorite companies. “Democratization" is the industry’s new buzzword du jour.
The rationale: Bringing trading to the masses, first by free trading (courtesy of the trend started by Robinhood), and now by the logical extension of fractional trading.
And by the look of things, the final word has not been said.
Changing the playbook
The fierce price wars by brokerage firms have seen discount online brokers such as TD Ameritrade, Schwab, AllyInvest and E*Trade cut equity commissions to the ground and made zero commissions the new norm.
Trading in fractional shares is now emerging as the next battleground as brokerages scramble for more customers and market share.
Fractional trading allows investors to buy and sell smaller portions of stocks or ETFs, sometimes for as little as a single cent. This can really come in handy for less wealthy investors or for the group of investors that wishes to test the waters before going all in. Fractional trading for individual traders is a new trend although mutual funds have been doing it for years.
Unsurprisingly, Robinhood, the pioneer of commission-free investing, has quickly established itself as one of the early leaders in the space. The online trading app lets you buy 0.000001 (a millionth) shares rounded to the nearest penny, or $1 worth of any stock. This in effect means you can now own a dollar’s worth of Berkshire Hathaway’s Class A shares, Amazon, Booking Holdings and other expensive shares.
Robinhood’s outrageous strategy even undercuts Square Cash’s fractional share trading which sets a $1 minimum for investment. The company’s free-trading ethos has forced brokerages to completely rewrite their playbooks by abolishing commissions and even prompted the blockbuster merger between Charles Schwab and TD Ameritrade.
As Robinhood CEO Vlad Tenev has told CNBC:
“We have so many investors that just want to dip their feet into the market and put ten dollars in. We think this will empower even more people to invest.”
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Other fintech startups that have joined the craze are SoFi and Stash while lending app MoneyLion is also looking to jump in.
However, it’s not just maverick trading apps that have embraced fractional trading. Charles Schwab became one of the mainstream brokerages to join the fray when it launched the service in October 2019.
And, it appears there’s plenty of pent-up demand for the service.
SoFi, which launched fractional trading in July, says demand for expensive stocks like Amazon and Alphabet is now through the roof with a good 78% of SoFi Invest member’ first trades fractional. Amazon, Apple, Tesla, Microsoft and Disney are the top five stocks on the app with users more likely to buy in dollar amounts instead of shares. offers access to only around 50 different stocks and exchange-traded funds. SoFi though only offers access to only about 50 stocks and ETFs.
Meanwhile, Chicago-based M1 Finance, an early adopter that started offering fractional shares in 2016, has become the biggest name in the space with an average 250,000 customer transactions per day.
Courting young customers
It’s quite obvious that brokerages are embracing fractional trading not for altruistic reasons but mainly to survive in an increasingly cutthroat world.
There’s another less obvious reason why brokerages want customers to get hooked on $1 trades: locking in young customers with a view to cross-sell products to them down the line.
By going after the so-called HENRYs--"high earners, not rich yet"-- brokerages hope to build a long-term relationship with this class of customers and do more business with them later on when they have serious dough to invest.
By Anes Alic for SafeHaven.com
