Fractional Shares Are Transforming The Stock Market
Fidelity’s colorful trading app is aimed at smaller investors
August 9 2020. Shares in Amazon.com this week closed above $3,200 per share - a far cry from its IPO price of $18 back in May 1997. If you’d have bought one share in the online retail giant back then you’d now be sitting on a profit of $3,182, equivalent to a 17,678% return on your original $18.
The idea of buying one share in a company’s equity capital seems as antiquated as the days when Wall Street brokers scribbled trades on bits of paper and runners dashed them around to other brokers in the pit of the stock exchange.
Digital trading changed everything years ago, but it also changed the way we think about investing in a company’s stock. The idea of buying, selling and owning whole shares has given way to the convenience of making trades based on nominal dollar values instead; ie. buying $1,000 of Amazon stock, regardless of what this equates to in fractional terms of shares.
If the digital age fueled fractional share investing, so too has the fact that shares are becoming more expensive to buy. In the old days, companies would ‘split’ their shares when the price rose too high in an effort to keep them affordable to new investors. When a share price doubled, say, from $40 to $80, the company would ‘split’ the share by doubling the number of shares in circulation so the price for one share would again be $40. Today, stock splitting is rare, and many share prices now stretch into the thousands. Take Amazon: Back in 1997, $1,000 would have scored you 55.55 shares; in the current market, $1,000 buys you 0.32 of one share.
New low cost trading platforms, including my app-of-the-year-fave Robinhood, are also increasing fractional ownership by encouraging smaller trades. Robinhood users can invest as little as $1 in individual stocks and ETFs, without any fees. Fidelity, E*trade and Schwab are also getting in on the game, offering similar ‘slice-style’ stock investing platforms without minimums or trading fees.
What’s all of this doing to the market? It’s hard to say, exactly.
What it is doing is changing individual investors’ behaviors about buying and selling shares, including mine: On Monday I made a spur-of-the-moment $5 leap into CVS, on the basis the drugstore giant’s 2Q earnings would beat expectations. I spent an inordinate number of hours during lockdown at my local CVS, mostly because it was the only store open other than my supermarket, scooping up hair coloring kits and home facials whilst my salon sat shuttered. Two days after buying CVS, I sold it. The company had reported solid but otherwise unremarkable results that failed to ignite any movement in its stock price. I decided I wanted out.
Deep in my heart, I know I shouldn’t have invested in CVS at all, not without doing more research, and if I did invest I should have held tight to at least see how things played out. After all, investing used to mean believing in a company and its fundamental business operations. Selling my CVS stake, however tiny, because I didn’t see an adrenaline-producing price pop after their earnings call is shear hypocrisy on my part.
My $5 investment in CVS at Monday’s price of $65.57 per share, bought me 0.08 of one share in the retailer. I then sold my 0.08 share on Wednesday when the stock price was $64.54, for a loss of -1.7%. Will the company or the market care about my investment? Of course not. But with hundreds of thousands of small investors just like me swarming into stocks every day, making millions of small trades of $5, $50, $500, $5,000 and so on, the importance of fractional investors is growing. My $5 still got me an invite to the shareholders’ conference call, even though I owned less than. 0.1% of one share of CVS stock.
Fractional share owners like myself currently represent a tiny portion of the investor base compared to the megalithic pension funds and other institutional investors, but as a bloc we’re beginning to make an impact on market movements. Robinhood reported more than three million new accounts were opned over the first four months of 2020, as younger investors in particular filled their empty hours under lockdown learning how to buy and sell stocks; from the looks of things there’s no sign the trend is slowing. New traders with little or no investing knowledge often buy into hot stocks and brands - Tesla, Apple, Twitter - that may not necessarily support their pumped-up prices. But if the market’s performance over the last three months is anything to go by, they’re winning at their own game and who’s to say when the end will arrive, if ever.
Historically, ‘day trading’ small sums in and out of individual stocks was a mediocre strategy compared to keeping your money parked in a diversified basket of stocks like an index tracking ETF. But these are uncharted times: The US government has injected $6 trillion of new money into the system, trading fees and expenses don’t eat away at returns, and executing trades can be done at the touch of a button from your smartphone, all day long. The old metrics for smart investing simply don’t apply in today’s market.
Day trading isn’t for everyone, but for those willing to manage their portfolios and keep a steady eye on the market, these are brave new days. I’m going to keep buying fractional shares as long as the market keeps signaling me to buy them; which isn’t to say I may change my mind as quickly as I made it.