For many people, the concept of investing in the stock market is a foreign concept. To some it may seem like gambling, and for others, it’s just a day in the life of a finance guru. The one thing most people can agree on is that it’s a complex process with no right answer. If it were simple, everyone would do it – right?
The investment industry is undergoing some major changes, and many firms are attempting to bring investing to a wider (read: younger) audience. The major shift has come in the form of fractional trading, which allows smaller investors to enter the trading floor where they otherwise might have been priced out. These programs come during a time when more Americans are at home, spending a majority of their time online already – so they’re perfectly poised to enter the market.[i]
Fractional offerings were available for a time during the dot-com building, but they disappeared for a while. Interactive Brokers was the first firm to reintroduce the practice in November 2019, and other firms have followed suit, including Chalres Schwab, Fidelity, and Robinhood.[ii] Fractional shares cannot be transferred from one brokerage firm to another, but many of the major players are participating. Let’s take a look at how they’re doing it.
Charles Schwab is a major player in the investment and securities brokering industry, holding 7.6% of market share.[iii] Schwab introduced their “Stock Slices” service in June of 2020, allowing investments in any S&P 500 company for as little as $5 each.[iv]
“We want to make stock ownership accessible to as many people as possible, from a new investor just getting started to someone more experienced who may find the share price of some companies out of reach,” said Neesha Hathi, executive vice president and head of Schwab Digital Services, according to BusinessWire. “Stock Slices allows anyone to invest using fractional shares, and we’re excited by the possibilities inherent in this functionality to enhance how clients invest.”
Essentially, investors now have the power to affordably build their portfolio with portions of major stocks like Apple, Facebook, Google, Amazon, and Netflix when purchasing a full share of each might otherwise cost in excess of $4,500.[v]
Fidelity launched their fractional trading program in January of 2020. Fractional shares are only available through their mobile trading app.[vi] According to Investopedia, their program has been popular among younger investors. Nearly half of Fidelity’s fractional trading clients are between the ages of 18 and 35.[vii]
Social Finance (SoFi)
Social Finance, sometimes known as SoFi, claims that fractional trades make up over a third of all stock buys. In the first six months of 2020, the company saw a 176 percent surge in brokerage accounts and a whopping 244 percent surge in total trading. Fractional trades served as the first trade place by over half of the company’s new traders.[viii]
Robinhood has become something of a phenomenon due to its game-like platform. It has gained a reputation as the darling of Silicon Valley and brought a younger group of investors into the stock market. But they’ve faced backlash as these inexperienced investors sometimes meet devastating consequences for their risky trading – which some would argue the company has encouraged through behavioral nudges and push notifications.[ix]
The company announced their fractional trading feature in December 2019 as a way to lower the bar for investors. “We have so many investors that just want to dip their feet into the market and put ten dollars in,” Robinhood CEO Vlad Tenev told CNBC in a phone interview. “We think this will empower even more people to invest.”[x]
With so many different players joining the fractional trading space, one can’t help but wonder how these firms plan to protect their clients and remain competitive in such a saturated field.
Questions for Marketing Managers to Consider:
- You work for Charles Schwab, which is considered one of the legacy brokerage firms. How do you position Schwab’s Stock Slices program within the industry?
- You work for Robinhood, which is widely considered a major disruptor in the investment industry. How does your marketing need to evolve as the company grows? How do you build the brand to rival that of legacy firms like Merrill Lynch, Morgan Stanley, and Charles Schwab?
- Is it the ethical responsibility of brokerage firms to protect and monitor new and inexperienced clients trading on their platforms for inappropriate and/or speculatory trading behaviors?
[i] Heath, Thomas. (2020). Shares by the slice: Fractional Investing sparks a stock market stampede. The Washington Post. Retrieved from https://www.washingtonpost.com/business/2020/07/10/shares-by-slice-fractional-investing-sparks-stock-market-stampede/
[ii] Carey, Theresa. (2020). Comparing Fractional Trading Offerings. Investopedia. Retrieved from https://www.investopedia.com/comparing-fractional-trading-offerings-at-online-brokers-4847173
[iii] Masters, Nick. (2020). Securities Brokering in the US. NAICS Report 52312. Retrieved from IBISWorld https://my-ibisworld-com.ezproxy.rollins.edu/us/en/industry/52312/industry-at-a-glance
[iv] Cianfrocca, Michael. (2020). Schwab Announces Availability of Schwab Stock Slices. BusinessWire. Retrieved from https://www.businesswire.com/news/home/20200602005704/en/Schwab-Announces-Availability-Schwab-Stock-Slices
[vii] Carey, Theresa. (2020). Comparing Fractional Trading Offerings. Investopedia. Retrieved from https://www.investopedia.com/comparing-fractional-trading-offerings-at-online-brokers-4847173
[viii] Heath, Thomas. (2020). Shares by the slice: Fractional Investing sparks a stock market stampede. The Washington Post. Retrieved from https://www.washingtonpost.com/business/2020/07/10/shares-by-slice-fractional-investing-sparks-stock-market-stampede/
[ix] Popper, Nathaniel. (2020). Robinhood Has Lured Young Traders, Sometimes with Devastating Results. The New York Times. Retrieved from https://www.nytimes.com/2020/07/08/technology/robinhood-risky-trading.html
[x] Rooney, Kate. (2019). Robinhood joins a wave of fractional stock-trading offers to bring investing to the masses. CNBC. Retrieved from https://www.cnbc.com/2019/12/12/robinhood-joins-a-wave-of-fractional-stock-trading-offers.html