By Alexander Osipovich
Trading slivers of individual shares has become a fervent
pursuit for thousands of individual investors, amplifying the 2020
rise of pricey yet popular stocks like Amazon.com Inc. and Tesla
Fidelity Investments, which rolled out fractional trading to
customers in January and February, says more than 340,000 of its
accounts have placed a fractional trade, in which the customer buys
or sells less than an entire share. Interactive Brokers Group Inc.,
another online brokerage, says around 117,000 users have enabled
fractional trading since the firm released the feature to
individual investors in November. Charles Schwab Corp. says more
than 60,000 accounts have bought its "Stock Slices" since it turned
on the feature in June.
Fractional trading has become widespread as stock splits have
fallen out of favor among some of America's hottest companies and
the coronavirus pandemic has intensified the appeal of top
technology companies, pushing share prices of many market leaders
into the hundreds or thousands of dollars.
One of the most discussed trends in markets this year has been
individual investors' renewed embrace of stocks, fueled in part by
coronavirus-fueled volatility and free trading apps like the one
from Robinhood Markets Inc. Proponents say fractional trading has
helped democratize access to the stock market.
But it may be encouraging risky speculation that some analysts
and academics warn will end with many individual investors losing
money. The S&P 500 has surged nearly 50% since March, despite a
rise in U.S. unemployment and other significant, unresolved
"I can buy stock in companies I could never afford," said Jacob
Gonzalez, 34 years old, who trades fractional shares on Fidelity
and Robinhood. "I've got Tesla now. I've got Amazon."
In about 80% of fractional trades, Fidelity says, the customer
specifies a dollar amount -- for instance, spending $500 to buy a
slice of a share of Amazon, which closed at $3,225.00 a share on
Fidelity customers can also specify what percentage of a share
they want to buy.
Robinhood wouldn't disclose how many customers use fractional
trading, but it says millions of people joined a wait list for
fractional trading after the company unveiled plans for the feature
in December. Since then, the most popular stocks for fractional
trading at Robinhood have been Tesla, Amazon, Apple Inc., Microsoft
Corp. and Netflix Inc., a company spokeswoman says. Shares of those
companies are each up at least 37% this year, compared with a 3.7%
rise in the S&P 500.
Mr. Gonzalez, a resident of Chino Hills, Calif., said he lost
his information-technology job in March and has less than $10,000
in his portfolio. He recently began doing deliveries for
food-delivery service DoorDash. A proponent of cannabis
legalization, Mr. Gonzalez said he often spends $4.20 on stock
purchases. The number 420 is a popular slang code for cannabis
consumption among marijuana enthusiasts.
Kelli Hernandez, a 31-year-old in Salem, Ore., joined Robinhood
this year and bought stocks including Novavax Inc., which is
developing a coronavirus vaccine. In June, Robinhood gave her
access to fractional trading. Ms. Hernandez, who works as an
operations manager in a nursing home, has used the feature to add
more Novavax -- whose share price has surged this summer -- and to
invest in Amazon, Apple and Netflix.
"If I could turn that around and buy a nice rocking chair for my
nursery, that would be a win for me," said Ms. Hernandez, who is
expecting a baby this fall.
The ability to hold fractional shares isn't new. Investors have
been able to amass portions of shares for decades through
dividend-reinvestment plans, in which a company's dividend payouts
are plowed back into purchases of its shares. What is new is the
ability to freely trade partial shares during market hours. Brokers
like Fidelity and Robinhood can now execute fractional orders
immediately, much as they execute ordinary orders to trade stocks
or exchange-traded funds.
Research has shown that trading frequently isn't good for
investors, and a simple buy-and-hold strategy works best over the
long run. Fractional trading will likely tempt some novice
investors to try stock picking, said Terrance Odean, a finance
professor at the University of California, Berkeley. Still, he
added, that shouldn't be excessively risky, because such investors
generally buy small quantities of stock.
"Will this encourage some speculation? Probably some," Mr. Odean
said. "But it's going to be speculation with a lot less money than
if people were forced to buy whole shares."
Besides the big online brokerages, an array of
financial-technology startups offer fractional trading, including
M1 Finance LLC, Social Finance Inc. and Square Inc. One app based
on fractional trading, Public.com, is backed by investors including
Hollywood actor Will Smith's venture-capital firm and National
Football League star J.J. Watt.
Not all apps work the same. M1 and Social Finance's SoFi app
execute fractional trades only once or twice a day, accumulating
customer orders to buy or sell slices of stock and executing them
together. That exposes investors to the risk that a stock price
could swing sharply in the hours between when the order is placed
and when it is filled.
An M1 spokesman said the firm caters to long-term investors and
its approach discourages unproductive trading. A Social Finance
spokesman said the firm was working on supporting real-time
Write to Alexander Osipovich at
(END) Dow Jones Newswires
August 06, 2020 17:01 ET (21:01 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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