Fractional Shares and Market Stability

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hare. The brokerage has to buy the remaining $3,213 of that stock. They can, of course, bundle other fractional buys of the same stock to lower the remainder, but those orders have to be arriving at roughly the same time to have minimal execution time.The brokerage can also liquidate the remainder at the end of the trading day, but the amount held could make or lose value. Any profits from this will probably be eaten up with the cost of information services to execute and keep track of these small transactions.The more popular traditional brokers have expanded into this service offering and each with a different set of tools and interfaces. I like Fidelity as it holds my retirement accounts, giving me a single dashboard and more analysis tools than I have time to figure out. I also keep a Robinhood account which is the essence of simplicity (and lack of analytics). Trading with a swipe for the price of bus fare is a kick.Bankrate maintains <a href="https://www.bankrate.com/investing/best-brokers-fractional-share-investing/">a list with details</a> and places these brokerages at the top of the list.<ul><li><a href="https://www.bankrate.com/investing/best-brokers-fractional-share-investing/#schwab">Charles Schwab</a></li><li><a href="https://www.bankrate.com/investing/best-brokers-fractional-share-investing/#fidelity">Fidelity Investments</a></li><li><a href="https://www.bankrate.com/investing/best-brokers-fractional-share-investing/#IB">Interactive Brokers</a></li><li><a href="https://www.bankrate.com/inves

Options

ting/best-brokers-fractional-share-investing/#Robinhood">Robinhood</a></li><li><a href="https://www.bankrate.com/investing/best-brokers-fractional-share-investing/#TD">TD Ameritrade</a></li><li><a href="https://www.bankrate.com/investing/best-brokers-fractional-share-investing/#etrade">E-Trade</a></li><li><a href="https://www.bankrate.com/investing/best-brokers-fractional-share-investing/#merrill">Merrill Edge</a></li><li><a href="https://www.bankrate.com/investing/best-brokers-fractional-share-investing/#vanguard">Vanguard</a></li></ul>This seems like a win/win all the way around, but there is one dark element lurking in the corner.That barrier to entry I spoke of, provides the benefit of investors having a “stake” in the market. If there are blocks of small-dollar investments jumping on whatever the hot stock of the day is, the market becomes speculative and volatile. Price rise and drop can be driven even more by popularity and perception rather than fundamentals and real value. We have seen the power of the collective when these small investors band together with the GameStop run-up. If fractional trading gets too large, it could outweigh institutional investments in small-cap businesses and undermine price stability. These businesses could find themselves in the land of OTC and penny stocks with more risk than is warranted.Only time will tell if controls will be put on fractional trading to reduce risk to businesses and brokerages, or if small investors get caught partying like it’s 1929.</article></body>

Thoughts on Robinhood and Micro-Investing

Still Life with Cheese, Floris Claesz. van Dijck, c. 1615. oil on panel. Photo by the author.

Fractional share trading is the best thing since sliced bread. Twenty years ago, I had an eTrade brokerage account, and most shares would split at some point to keep the price roughly under $100. But there were a few stocks like Berkshire Hathaway that were in the thousands, way more than my total portfolio. Therefore I was shut out for being, hate to say it, petite bourgeois.

For the lower-earning proletariat, stock trading was completely unreachable until late in 2019 when Interactive Brokers offered fractional share trading on the common U.S. markets.

Brokerages are doing this to attract younger investors who, as their careers develop, will expand their investments into larger accounts. The brokers make some money on the margin of trades and fees for ancillary services and upgrades while grooming the future wealth investors.

All stock trades are bundled before going to the floor, but fractional trading requires the brokerage to round up the buy order to the nearest whole share. When you place an order for $10 of Amazon, you are buying 0.003101 of 1 share. The brokerage has to buy the remaining $3,213 of that stock. They can, of course, bundle other fractional buys of the same stock to lower the remainder, but those orders have to be arriving at roughly the same time to have minimal execution time.

The brokerage can also liquidate the remainder at the end of the trading day, but the amount held could make or lose value. Any profits from this will probably be eaten up with the cost of information services to execute and keep track of these small transactions.

The more popular traditional brokers have expanded into this service offering and each with a different set of tools and interfaces. I like Fidelity as it holds my retirement accounts, giving me a single dashboard and more analysis tools than I have time to figure out. I also keep a Robinhood account which is the essence of simplicity (and lack of analytics). Trading with a swipe for the price of bus fare is a kick.

Bankrate maintains a list with details and places these brokerages at the top of the list.

This seems like a win/win all the way around, but there is one dark element lurking in the corner.

That barrier to entry I spoke of, provides the benefit of investors having a “stake” in the market. If there are blocks of small-dollar investments jumping on whatever the hot stock of the day is, the market becomes speculative and volatile. Price rise and drop can be driven even more by popularity and perception rather than fundamentals and real value. We have seen the power of the collective when these small investors band together with the GameStop run-up. If fractional trading gets too large, it could outweigh institutional investments in small-cap businesses and undermine price stability. These businesses could find themselves in the land of OTC and penny stocks with more risk than is warranted.

Only time will tell if controls will be put on fractional trading to reduce risk to businesses and brokerages, or if small investors get caught partying like it’s 1929.