What the Rise of Fractional Trading Says About Modern Investors

Brady Fletcher  |

Image source: Pixabay

The average investor doesn’t own Berkshire Hathaway Class A shares. Why? Before the recent market downturn, its stock was valued as high as $350,000. Now, as the global economy struggles to respond to COVID-19, you still have to spend around $320,000 to own a tiny piece. Most investors must be content with owning B shares of the company, which only carry 1/10,000th of the voting rights as the A shares.

Even in a bear market, buying a single share of Warren Buffett’s holding company is unrealistic for most. Amazon and Google — both of which saw their stock prices soar above $1,000 in the last few years — look affordable by comparison but are still out of reach for a large demographic. The high costs of these shares are ultimately a barrier for investors who want to take part in the growth these companies usually see.

As part of a broader attempt to give the average investor more access, we’re seeing a new approach emerge: fractional trading. Just as fractional ownership has become a trend — from clothing with projects like Rent the Runway, to real estate, where fractionable purchases are replacing timeshares — fractional investing is a new way to democratize investment. And it’s making it possible for smaller players to capitalize on the successes of market monoliths.

What Fractional Trading Brings to the Investment Table

As a practice, investing in shares has always been technically fractional: You buy one share and own a fraction of a company. Brokerages or institutions like Charles Schwab and Square are taking it further. These companies facilitate fractional trading by buying entire shares and dividing them up across multiple accounts. Schwab, for instance, enables investors to buy fractional shares of any S&P 500 index component stock for just $5. Square will permit investments of as little as $1 into Berkshire's A shares.

Fractional trading gives average investors more opportunity to diversify the funds they allocate to the stock market. For instance, instead of putting $2,000 into just one stock, they can distribute it across several companies.

The benefits go beyond the individual. As the markets open up to a larger audience of investors, it adds capital to the system and helps create liquidity for companies that can reinvest funds into jobs, development, and communities.

Fractional trading may be an important tool for opening up public markets, but it can’t solve the broader participation issue alone. It may facilitate funding into larger companies, but there’s still much to be done to enable investors to access growth-stage companies. These companies used to frequently access the public markets, but many tend to remain private today due to the appeal of venture capital or the increased regulatory burden that makes it difficult to list on an exchange.

What it does do, however, is show us that investors do have a deeper desire for more involvement in public markets.

The Average Investor Wants to Actively Engage With the Markets

There’s a perception that Wall Street is an insider’s game and the average retail investor — who can’t access sophisticated algorithms, investment bank analysts or Fortune 500 executives — is disadvantaged. But that hasn’t stopped people from finding other ways to make their money work for them.

In recent years, public interest in cryptocurrencies, security tokens and crowdfunding has shown that individuals are eager to engage with financial tools that resemble public markets, improving their opportunity to access bigger returns. The same can be said for the growth of initiatives like AngelList, which democratizes startup funding and enables people to invest in a growth-stage opportunity that’s typically reserved for high net worth individuals and VC firms.

What’s more, investors are increasingly connecting on forums to share information about sectors and companies in which they might have interest. This is taking place across popular platforms like Facebook, LinkedIn, YouTube and even Reddit, as well as charting websites that encourage users to share tools and ideas. The fact that some of these conversations contain better impartial analysis than market insiders shows that the everyday investor has a strong appetite for market access.

Getting Retail Investors in the Room

While fractional trading offers a viable option, there are other ways for individual traders to become more involved. In fact, many market leaders and technical analysts believe now is a particularly opportune time for retail investors to take advantage of sell-offs in the market and participate in companies that are trading at discounts to their previous highs.

Exchange-traded funds, for instance, provide an easy mechanism for buying a thematic portfolio at a lower price. Operating almost like an index fund, sector ETFs enable investors to take bullish or bearish positions in specific industries while offering excellent liquidity, low fees and investment management choice — characteristics that make them appealing to younger investors.

Similarly, discount brokerage platforms like those offered by Merrill Edge, Wealthsimple or SoFi remove minimum account thresholds and allow users to self-direct their portfolios. These solutions can be complemented with participation in forums, communities, and other resources that can help investors identify opportunities and make informed decisions.

And regardless of how much or how little stock you intend to buy, markets like TSX Venture Exchange can provide access to a number of growth-stage companies whose shares trade for less than a dollar. These stocks don’t yet meet the inclusion threshold for many ETFs but offer participation in potentially exponential growth situations before mainstream funds do.

Fractional trading represents a step in the right direction when it comes to opening up public markets to more retail investors — but it’s not a comprehensive solution. For ordinary investors who want a chance to increase exposure, ETFs, discount brokerages and venture exchanges are also great ways to engage with markets in more substantive ways.

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Brady Fletcher is managing director of TSX Venture Exchange, a Canadian public venture market. The views provided in this article reflect those of the individual author. This article is not endorsed by the TMX Group or its affiliated companies.

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Equities Contributor: Brady Fletcher

Source: Equities News

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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