As younger investors enter the trading scene and find themselves looking at popular stocks that trade for over $1,000 per share, the popularity of trading fractional shares has risen considerably. A fractional share is a portion of an equity stock that is less than one full share. In the past, investors have found themselves with fractional shares in their portfolios as a result of dividend reinvestment, stock splits, or mergers and acquisition. You could hold a fractional share in your account, or sell it, but until fairly recently it’s been extremely difficult to buy part of a share.
There were a few fractional share offerings during the dot-com buildup, but they have disappeared. Several major online brokers have started to re-introduce fractional share trading, made more friendly for their customers in the wake of cutting commissions to $0. Interactive Brokers kicked it off in November 2019, and now Fidelity, Charles Schwab and Robinhood have also enabled fractional share trading. Most robo-advisors feature fractional share trading so that their clients can maximize the assets held and put all of their cash to work. There are additional brokerages working to make fractional share trading available to their customers; we will update this article as the services are launched.
This market exists because the longtime tradition of splitting shares when the price settled above $100 has evaporated, with some companies considering their extremely high share prices as an ego boost. High share prices have unfortunately made some companies an impossible investment for individual investors, taking them out of the retail market and making them available to institutions instead. Fractional shares allow some retail involvement.
- Online brokers are introducing programs that allow purchases of fractional shares of stock
- There are key differences between the broker offerings, including minimum purchases and the universe of available stocks
- Zero-commission trading makes fractional share programs affordable
- Younger investors are participating at a higher rate than other age groups
History of Fractional Shares
There were a few scattered offerings of fractional shares starting in 1999 with the November launch of BuyandHold, which is now long gone. For a subscription of $1-3 per month, you could buy shares in small dollar amounts. The site encouraged its customers to make regular purchases on a monthly basis, building up a nest egg over time. In 1999, there were a few no-fee brokers around, but they didn’t last long. Most other online brokers charged $9.99-24.99 per transaction, so it was nearly impossible to develop a profitable trading strategy by purchasing a share or two at a time. That monthly fee, which sounds outrageous now, was actually a good deal.
Large online brokers, once they cut fees to $0 for equity trades, enabled odd lot trading that didn’t penalize their customers with commissions on small trades. In November 2019, Interactive Brokers launched its fractional share trading capability of U.S. stocks listed on NYSE, AMEX, NASDAQ, ARCA, or BATS, as well as OTC Pink U.S. penny stocks with average daily volume above $10 million and market cap above $400 million. Others followed suit, and now there are four major brokers and several automated trading services that allow trading of fractional shares in real time. Most robo-advisors have fractional share trading enabled for balancing portfolios, though the timing of those trades is not set by investors. For example, Stockpile places all the trades that customers have requested during the day at market close. We included M1 Finance in this table because they also allow real-time trading of fractional shares.
New Investors Latch on to Fractional Shares
Fidelity tells us that their fractional trading program, which launched in January 2020, has been a hit with younger investors. Nearly half (45%) of Fidelity’s fractional trading clients are between 18-35 years of age. Through the first three quarters of 2020, approximately 630,000 Fidelity accounts have traded fractional shares with the majority of the trades made in the FAANG stocks as well as Microsoft (MSFT) and Tesla (TSLA).
Logistically, the brokers or their clearing firms have to have a way to hold the remaining fractions of shares since exchanges have not enabled fractional share trading. So if you are a Schwab client and you buy 0.2 shares of Apple, the other 0.8 shares are held by Schwab in an internal inventory account. That fraction may be used to fulfill another customer’s order, or it is liquidated at the end of the trading day.
Another complexity of holding fractional shares comes if you move a brokerage account to another firm. Only full shares of stock can be transferred, so any fractional shares you hold will be liquidated, which may create a taxable event for the investor due to capital gains. The cash from those transactions can then be transferred to the new brokerage along with any full shares that you hold. An additional downside to holding fractional shares is that they cannot be hedged, and they don’t allow for basis improvement through writing covered calls.
Here are the services currently available for real-time trading of fractional shares.
Charles Schwab “Stock Slices”
Schwab’s “Stock Slices” program was launched on June 2, 2020. The program enables clients to purchase any S&P 500 stock for a minimum of $5 per stock. Clients can queue up a group of 10 stocks and place a single transaction, dividing their investment evenly among the 10 symbols. Customers can hold fractional shares of all 500 S&P stocks if they’d like, but only 10 at a time can be purchased. If you set up four stocks to purchase and committed $50 to this group, you would hold the fractional equivalent of $12.50 of each stock once the transaction completed.
Schwab Stock Slices are available in retail Schwab brokerage, custodial, and individual retirement accounts (IRAs). A Schwab spokesperson says, “Many new investors see this environment as an opportunity to get into the market, and this is another vehicle for them to do so.” The program is new enough that Schwab was unable to give us participation statistics.
Schwab’s offering is the most restricted in terms of the universe of stocks available and also has the highest minimum purchase.
Fidelity’s “Stocks by the Slice”
Fidelity launched its fractional trading program, “Stocks By The Slice,” at the end of January 2020. A new trade ticket was added to Fidelity’s native iOS and Android mobile apps, allowing a customer to purchase a certain dollar amount or fraction of a share of any exchange-listed stock (except for Berkshire-Hathaway type A stock, ticker BRK.A). Fidelity added fractional share trading to its web platform in fall 2020.
As of the end of Q3 2020, over 80% of participants in the fractional share program chose to make a dollar-based purchase while the rest entered orders in pieces of a share. The minimum purchase must be $1.00 or more as long as it comprises at least one one-hundredth (0.001) of a share. Trades are executed in real-time, and clients can specify a market or limit order.
Fidelity offers “Stocks by the Slice” in brokerage, HSA, IRAs, and custodial accounts. It is also available to customers with a self-directed brokerage account within their 401(K) plan. Prior to entering your first fractional share order, you’ll be prompted to review your customer agreement.
Interactive Brokers Fractional Trading, with access to all U.S. listed stocks, is available on all of the firm’s platforms for IBKR Lite and IBKR Pro customers as well as clients of financial advisors, except those who reside in Israel or have Canadian RRSP/TFSA accounts. Eligible clients must enable fractional share trading in Client Portal/Account Management prior to placing their first trade. Fractional share purchases can be made in dollar amounts or share amounts once the account has been enabled. Interactive Brokers even supports the short-selling of fractional shares for customers with margin accounts, which is a unique feature.
This is by far the most flexible of all of the fractional share programs, both in terms of the breadth of the stocks available as well as the order types available. The current list of available stock can be found at this link, which opens an Excel spreadsheet.
Fractional share buying is a built-in component of M1’s Invest product, which launched in 2016. M1 offers most NYSE, NASDAQ and BATs traded stocks and ETFs, comprising over 6,000 exchange-listed securities. Fractional share trading is enabled for every available security. M1 aggregates all clients’ trades and executes them together during a trade window though clients can also place individual fractional share trades in real-time for an additional fee. The remainder of what’s left over after being allocated to customers’ accounts goes into an account owned by M1.
CEO Brian Barnes believes that M1 is the biggest trader of fractional shares in among U.S.-based brokers. “Every day, we do about 200,000 fractional share trades for our customers. To put that in perspective, E*TRADE did ~44,000 trades per day for all of its customers in the month of April,” states Barnes. Barnes says that M1 owns between 0 and 1 share of the entire universe of stocks and ETFs that customers can trade. When the number of shares held by M1 exceeds 1, the full share is sold.
Fractional share trading is available to all Robinhood customers, having rolled out throughout 2020. Stocks and ETFs worth over $1.00 per share with a market capitalization over $25,000,000 are eligible for fractional share orders. In addition, Robinhood clients can trade fractional shares of Alibaba and Nintendo ADRs.
If a stock or ETF isn't supported, Robinhood lets you know when you're entering the order. The minimum order size is $1 and/or 1/1000000 of a share. A Robinhood spokesperson estimates that there are just under 7,000 stocks eligible for fractional share trading.
Opportunities and Risks for Brokers
Brokers offering fractional shares are seeing an influx of younger investors, and an increase in trading activity. Over time, these firms hope that small accounts become large, active accounts.
But for the brokers themselves, offering fractional share trading comes with a number of challenges and risks. There is the bookkeeping nightmare of keeping track of these tiny slices of stocks and ETFs, which requires some investment on the part of the brokers and their clearing firms in information services and inventory management. Then there is the financial commitment since the brokerage house itself holds the remaining fractions. In a rising market, that could generate some additional profits for the brokers, but should we see another crash, the brokers will lose money along with their clients.
Any new brokerage that launches in the next couple of years will need to consider offering fractional shares in order to compete. The new firms are already locked in to zero commissions due to what has become an industry standard. Fractional share features could be another barrier to entry to new brokerage firms.