Whatever you think comprises the American Dream—a corner office, a private jet, a bulging stock portfolio—the updated version is probably a fraction of that.
A fraction of an office, a fraction of a jet, and a fraction of a stock share.
Think of it as the Fractional Economy, and now it has come to the investing world in a big way.
Previously the area of smaller shops like M1 Finance, Stash, and Stockpile, fractional share purchases are now being offered by investing giants like Fidelity and Charles Schwab. Both have rolled out their own fractional offerings for retail investors in the last few months.
It’s not a new concept, to be sure—fractional shares have always been available to big institutional investors, for instance. But now they’re available to people with only a few bucks, which makes for an intriguing shift in the retail landscape.
“Thinking in terms of shares is kind of archaic,” says Howard Lindzon, managing partner of venture capital firm Social Leverage and co-founder of social network StockTwits, who has bet on numerous investing platforms like Robinhood, eToro and Rally.
“Why should someone have to invest $2,100 for a share of Amazon? If my daughter wants to invest $1,000, she should be able to break that down whatever way she wants. I think fractional share investing is here to stay, and it makes sense for Millennials who want to invest dollar amounts, not share amounts.”
So why the need? These days, companies aren’t showing much interest in stock splits—which used to happen fairly regularly, and made individual shares more affordable. A Class-A share of Berkshire Hathaway (BRK-A) is around $340,000, Alphabet (GOOGL) is over $1,500, and even humble fast-food eatery McDonald’s is over a lofty $200 a share.
So if you’re starting small, and aiming to own a piece of a particular company that has caught your fancy, fractional shares can open the door to building a portfolio.
A fractional approach to life and investing certainly seems to be in vogue. Companies like WeWork advanced the fractional idea with shared spaces, while Airbnb lets you share your home, and Uber shares your ride. Heck, these days you can even share back-office corporate services, through firms likes CFOShare.
One benefit of fractional investing is not necessarily the investment itself, but the fact that it potentially automates your saving and forces you to dollar-cost average into the market. If it locks in a monthly $100 contribution, for instance, that is a positive step for most investors.
What fractional investing is not great for, at least if you are talking about individual company shares: Diversification. Nibbling away at Amazon shares is well and good, but if the company goes into the tank, you are highly exposed to market fluctuations. Beginner investors shouldn’t typically be starting their portfolios with single company shares, but should be looking at broad market indexes.
“Fractional investing incentivizes folks to start portfolios that are very under-diversified,” says Richard Davey, a financial planner with Fiduciary Financial Group. “As a rule of thumb, I really don’t think a client should be buying any individual stock if they can’t afford a whole share.”
A steadier approach to fractional investing might involve exchange-traded funds (ETFs), baskets of stocks which can also be purchased on a partial basis through platforms like Fidelity’s and Schwab’s.
In fact, the idea of fractional investing isn’t all that new: It’s very familiar to anyone who has a Dividend Reinvestment Plan (DRIP) at their brokerage. If you have a Procter & Gamble investment, say, which throws off a $80 quarterly dividend, then that cash gets plowed back into the company—but that rarely ends up as perfectly whole shares, so what you end up with is fractions.
A final caveat: If all investors can afford these days are mere fractions of shares, it might be a broader indication that market valuations are at “nosebleed” levels, warns financial planner George Gagliardi of Lexington, Mass. As a possible sign of a market top—we are well into the late innings of one of the longest bulls in market history, after all— it would be wise to proceed cautiously.
Generally speaking, though, if a fractional approach ushers more young investors into the market with commission-free trading, that is a positive step for an industry that has historically turned up its nose at investors with smaller sums.
If you haven’t acquired the American Dream quite yet—well, at least you can start with a piece of it.
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