The upcoming stock splits announced by Apple and Tesla are two high-profile examples of Wall Street capitalizing on the burgeoning interest in fractional shares.
The popularity of online day-trading platforms such as Robinhood — which lets users buy as little as $1 worth of a company’s stock — is giving younger and less wealthy investors the chance to get a toehold in an expensive market.
“I just recently got back into investing,” said Corey Grottola, owner of a public polling firm based in Phoenix. “I started with Robinhood about six months ago because it was simple and user-friendly.”
Grottola, 38, said being able to buy fractional shares of hot stocks such as Tesla was a big part of the appeal. ”Tesla is on a big jump. It allowed me to buy $50, $100 at a time and kind of buy it on the dips as it was getting bigger. The fractional shares allowed me to build up to it,” he said.
Next week, Apple is executing a four-for-one stock split, and Tesla announced a five-for-one split that will be implemented at the end of the month. Both companies cited wanting to make their stock, which currently trades at roughly $460 and $1,800, respectively, accessible to small investors who can’t afford to buy individual shares at their current prices, a strategy investing pros say can increase volatility, but can also make a company’s value grow.
“It increases the opportunity for retail investors to own shares of companies, allowing them to spread out their assets potentially to a wider group of stocks,” said Andrew Thrasher, portfolio manager at Financial Enhancement Group.
For a generation raised in an era of point-and-click gratification and infinite customization options, the appeal of being able to slice and dice their investments is clear.
Before this boom in fractional share trading, an investor without enough money to buy a single share typically would have to buy into a mutual fund or ETF to get exposure to that company.
Fractional trading has lowered the bar to entry considerably. “People only have a few hundred bucks, and they get the impression that if they go to other, traditional firms, they don’t have enough,” said Ken Mooso, cofounder of PersonaFi, a startup social network for day-traders.
“I use Cash App to do small purchases because it lets you buy portions of stocks,” said Jeff Wickliffe, a professional photographer in New Jersey. “The tech makes it a bit easier to do without any middleman.”
Wickliffe, 45, said he likes having a low-risk way to invest small amounts. “I only play with what I can afford to lose, so like $100 to $200 at a time,” he said. “I’m not a gambler in general, so I really look into the stuff I buy.”
Some investing pros, though, worry that eye-popping valuations are attracting less-sophisticated investors who have little experience navigating market volatility, and — in an economy where inequality and financial insecurity are on the rise — even less margin for error.
“The ability to buy a fractional share certainly broadens the appeal of stock ownership,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott. “The risk, however, is that it invites a casino mentality.”
For a generation raised in an era of point-and-click gratification and infinite customization options, the appeal of being able to slice and dice their investments is clear. “For those wanting to have more control of what companies they own, then fractional shares potentially helps them accomplish that,” Thrasher said.
The heavyweights of the investing world have taken notice: Charles Schwab made fractional trading available in June, and Fidelity rolled out fractional trading to its mobile app users earlier this year. Between the end of March and the end of July, the number of Fidelity accounts making fractional trades rose from 102,000 to 343,000, the company said.
The advent of commission-free stock trades also accelerated the trend. “I think the proverbial game has changed due to the practical elimination of trading costs,” Thrasher said. “That friction of buying and selling shares diminishes the wall separating the average retail investors from participating in stock ownership, compared to the high cost of trading 15- to 20-plus years ago,” he said.
For experienced investors trying to optimize their returns, fractional trading can maximize the precision of portfolio-balancing, said Rob Cavallaro, chief product and investment officer at RobustWealth, a financial advisory management software firm. “You can buy the precise amount you need and be better aligned with your investing goals.”
The reality, though, is that many investors see fractional investing as the only viable path to participating in a soaring stock market. “A lot of people are trying to get rich quick,” Mooso said.
“They think day-trading is something that can provide them with an extra stream of income,” Mooso said. Young investors used to earning a few extra bucks as dog walkers or rideshare drivers see app-based investing platforms like Robinhood as another side hustle, he said — one that has remained accessible in the wake of COVID-19-related shutdowns.
But given the prospective loss of principal that come with stock trading, particularly for novice investors, the potential risk is high.
“The challenge that I see here is when the average or typical investor goes and buys stock, what they’re buying is the top 10 performing stocks they’ve seen in the past six months. What they’re doing is they’re buying high,” said Brent Weiss, co-founder of Facet Wealth.
“Arguably, that’s the last thing we should be buying,” he said. “The average or typical investor trails the market by a significant amount. This starts to erode or destroy wealth for investors who believe they’re doing well.”
“It kind of reminds me of the dot-com bubble,” said Nate Fischer, chief investment strategist at Strategic Wealth Partners.
“When it comes to investing, there will be some harsh realities for these people when the market eventually dips,” he said. “There’s that mentality where you treat it like a roulette wheel. People who do this for a living know it’s not that easy.”