Fintechs and brokerages are vying for a smaller piece of your investing wallet.
As the value of hot stocks soars beyond what some investors can pay—Amazon is $2,442 per share, Berkshire Hathaway is $278,640 per share—brokerages are attracting new customers by giving investors the ability to buy a fraction of a share.
Fidelity Investments began offering partial stock trades to clients in late January after rival Robinhood announced its fractional trading plans in December. And today Charles Schwab will launch Stock Slices, giving investors the ability to invest in a portion of an S&P 500 stock starting at $5. According to the company, Slices was built in response to burgeoning demand for the so-called FAANG stocks—Facebook, Amazon, Apple, Netflix, Google—the lowest of which, Facebook, currently trades at $225 per share.
“We started hearing about investors who are interested in getting into the market and maybe wanted to participate in the FAANG stocks and tech companies, but saw these prices and felt sticker shock,” said Neesha Hathi, chief digital officer at Charles Schwab.
For brokerages, fractional shares could be a significant way to attract new, younger investors that see the high returns tech companies can bring but are wary of dipping a $200 toe into the water. Anthony Noto, CEO of fintech SoFi, told CNBC recently that 40% of trades via its brokerage platform came from fractional shares.
“We believe that the millennial earlier investor would be where the demand would be,” said Hathi.
But in an age of zero commissions, the key for brokerages isn’t simply getting investors to try fractional trading, but persuading them to stick around and sample the rest of a company’s offerings.
The trend toward fractional trading also comes at a time when stock splits—when companies with high share prices fractionalize shares to more affordable levels—have fallen out of favor (Apple is one outlier, having split its stock several times). A higher stock price after all could mean less volatility and a tighter hold on who the owns the shares, as Berkshire Hathaway CEO Warren Buffett famously opined in 1984 letter to shareholders.
Unlike, say, Fidelity, Charles Schwab has constrained its fractional trading to the S&P 500—where it sees the most demand. That also means investors with a taste for risk who hope to invest in yet unprofitable companies for a fraction of the cost won’t be able to invest in Tesla or Spotify, as the index excludes companies that have not reported positive earnings in the most recent four quarters. But Charles Schwab isn’t ruling out a wider net either.
“We would very much be interested in broadening the universe” if clients are interested, said Hathi.
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