Shares by the slice: Fractional investing sparks a stock market stampede

  • Investors can own the biggest names in capitalism without paying full freight for a share of Apple ($380), Netflix ($500), Alphabet ($1,500) or Amazon ($3,000). And they can do it for as little as a penny.

    Investors can own the biggest names in capitalism without paying full freight for a share of Apple ($380), Netflix ($500), Alphabet ($1,500) or Amazon ($3,000). And they can do it for as little as a penny. (AP Photo/Mark Lennihan, File, 2018)

 
 
Posted7/18/2020 6:14 AM

Investors can own the biggest names in capitalism without paying full freight for a share of Apple ($380), Netflix ($500), Alphabet ($1,500) or Amazon ($3,000). And they can do it for as little as a penny.

Fractional investing, popularized by stock-trading apps like Robinhood and SoFi, surged this spring as legacy brands like Fidelity, Charles Schwab and Interactive Brokers jumped into the fray. It allows investors to buy partial shares -- by the slice -- an option that has particularly resonated with millennials in recent months as the U.S. stock market clawed back from its March lows. Robinhood, whose clients have a median age of 31, added more than 3 million accounts during the first four months of 2020 and now has more than 13 million users.

                                                                                                                                                                                                                       
 

"Robinhood looks very nice and it's got an ease of use that I haven't experienced elsewhere," said Tomas Garchitorena, 25, who has a degree in quantitative finance and works for a start-up in New York City. "I own whole or fractions of shares in Tesla, Apple, Google and Microsoft."

Remarkable stock market volatility, a pandemic that has marooned millions of people at home, the suspension of sports betting, a rising generation weaned on gaming and digital entertainment, and zero-commission trading have converged into an online stock-trading stampede. Proponents say the option is a leveler, creating an opening for small investors who might otherwise be priced out of the stock market.

"We want to try to get new investors to appreciate the long-term value of investing," said Scott Ignall, who oversees the retail brokerage division at Fidelity. "Fractional shares lower the barriers to entry."

Though the strategy might lower risk, it's an unlikely path to long-term wealth. "The very fact that they are a fraction of a share means they are rarely a lot of money," said Terrance Odean, a behavioral economist at the Haas School of Business at the University of California at Berkeley. "Fractional shares make it easier to be diversified, so you probably don't have a lot to lose on any one company. But you probably aren't going to get rich."

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Burton Malkiel, author of the investment classic, "A Random Walk Down Wall Street," dismissed fractional shares as "instruments of the devil." He is of the buy-and-hold school and said low-cost index funds are the surest route to stock market wealth.

The retired Princeton economics professor said discount brokerages such as Schwab, TD Ameritrade, E-Trade and Interactive Brokers have already helped democratize the stock market by slashing fees. But he said he's not crazy about their expansion into financial instruments that might turn users into speculators.

"This is part of what I call the day-trading pandemic," he said "What's happened is that without sports betting, people have looked for other ways to gamble. And they are gambling in the stock market through day-trading."

The fact that trades are virtually free -- brokerages make money off customers in other ways -- has whetted the appetite for online traders during the pandemic shutdown. In June alone, Interactive Brokers, traditionally the leader in trades, processed nearly 1.9 million transactions. That's a 131% jump year over year and 13% higher than May. Client accounts topped 876,000, a 36% boost from June 2019.

                                                                                                                                                                                                                       
 

Social Finance, a digital finance company known as SoFi, says fractional trades represent 35% of all stock buys, with Amazon, Tesla, Apple, Walt Disney Co. and Microsoft the most popular, according to a spokesperson. In the first six months of 2020, the number of brokerage accounts jumped 176% and total trading surged 344%, according to a spokesperson. More than half of the platform's first-time users make fractional shares their first trade.

Keith Russell, 38, who works in cybersecurity in Illinois, said he has been trading stocks for a year but picked up the pace in March, when stay-at-home orders went into effect as the coronavirus swept the country.

"I saw the market volatility, and I work at home anyway. But I didn't have anyplace to go in my spare time, so the fractional shares provided me an opportunity to get in the market with a few dollars here and there," said Russell, who trades on SoFi. "I was able to get fractions of Amazon, Tesla and Zoom. I knew Zoom was going to be huge."

"It's called FOMO," said Kenny Polcari, who worked the floor of the New York Stock Exchange for 34 years and is now with SlateStone Wealth. "It's fear of missing out. You have these millennials at home during the lockdown, bombarded all day by advertising that tells them to take control of their lives. Then they see free stock trading and jump into it."

Proponents of fractional shares said there are plenty of upsides. There is no transaction fee to buy and sell stocks. By simplifying the trading experience and allowing investors to think of purchasing shares in terms of round dollars, most of the friction is gone, including the need to calculate the number of shares they can afford.

"It introduces young people to the stock market, which is a good thing," Polcari said.

But investing requires discipline and research. Robinhood's gamelike interface has come under criticism for making trading too inviting for novices. Users tend to trade more on Robinhood than other sites, with some reports of devastating losses.

Schwab allows investors to click on "stock slices" at the top of their account screen and select a single stock or collection of stocks they want to purchase. A $50 investment across five stocks, for example, would appear as a $10 purchase of each stock, and the order would show the number of shares or fraction of shares that $10 would buy based on stock prices at the time of execution.

Purchasing a single share each of Apple, Google, Facebook and Amazon would total more than $5,000, based on the past week. A $100 outlay by a Schwab client using Stock Slices, which the company launched in early June, would buy each in $25 increments and a corresponding share in the dividends.

Schwab's strategy is twofold: to attract new investors who can't afford the three- and four-digit price tags that many of the big, high-performing stocks command, and to offer clients the opportunity to open custodial accounts that could be passed on to minor family members as an introduction to investing using fractional shares.

"Fractional-share trading is an ingredient to power an experience," said Neesha Hathi, Schwab's chief digital officer.

At Interactive Brokers, fractional shares are less about recruiting new investors and more about expanding offerings to experienced traders.

"We have no interest in getting unqualified newbies to gamble on stocks," said Steve Sanders, executive vice president of marketing and product development at Interactive Brokers. "We offer fractional shares to sophisticated investors as another tool to better manage their portfolios."

Stuart Cohen, who works in finance in Washington, D.C., is no novice. Cohen, in his early 60s, jumped on the Cash App site, owned by Square, to try out fractional shares. Over several installments, Cohen bought $500 worth of Berkshire Hathaway, whose A shares retail for more than $250,000 each. Cohen also bought $500 in bitcoin.

"I did it more as an experiment in due diligence," said Cohen, adding that he is an investor in Square. "I may not fit in the box of the new millennials that are getting on this. It's very good for small investors who wanted to start saving."

Adam Hostetter, 22, has been trading stocks since high school. With more than $50,000 in his Robinhood account and time on his hands during the pandemic, he said, he recently purchased an eighth of a share of Google-parent Alphabet for $184.

"It was seamless," said Hostetter, who recently graduated from the University of Maryland with degrees in finance and operations management. "Robinhood is made for my demographic. It said, 'Do you want to invest in dollars or shares?' I listed $184 dollars and bought a piece of Alphabet. It was a good way to put some extra cash to work."

Some financial advisers see fractional shares as a bit of a novelty.

"If you want to learn about stock market investing as a hobby or you are a student looking to learn how the market works, fractional shares might be useful," said Ian Salisbury, senior editor of Money, a personal finance publication.

One reason behind fractional trading is that stocks have simply become more expensive. Until the past few years, most companies would "split" their shares if they became too costly for investors.

"Companies always wanted to target their stock price in the $40 range, so if the stock price rose to $80, they split it two-for-one to get back to $40," said David Kass, a finance professor in the University of Maryland's Robert H. Smith School of Business. "Shares were more affordable. "

The practice of splitting stocks has been done away with, leaving many average investors to come up with more cash to make a purchase. With the onset of inexpensive and free online stock trading, many investors are finding that even single-share stocks are too lofty in price.

"If you look at the five most highly capitalized stocks -- Apple, Microsoft, Amazon, Alphabet and Facebook -- every one of these stocks is more than $200," Kass said. "So fractional shares make sense." (Amazon founder and chief executive Jeff Bezos owns The Washington Post.)

Kass said on the whole, the positives outweigh the negatives, but he said he is troubled that fractional trading encourages speculation.

"People could be looking at stock trading for the entertainment value, and inexperienced shareholders could lose money," he said.

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