Fractional investing signals change in the way we think about stocks
Link copied to
Ever looked at a stock, let’s say Amazon, and thought “shoulda jumped on that when I could still afford it”?
Amazon closed last week at $US3,148 ($4,381) and is up 65 per cent this year.
Back in the day you’d have had to save up $US3,148 (plus brokerage) to buy a piece of the online retailer, or buy into a tech exchange traded fund (ETF) that included the company.
But over the last couple of years investing platforms such as Stake and eToro, and Xinja if it gets a proposed US share trading platform off the ground, have evolved to offer fractions of shares.
They buy a whole stock and divvy pieces out to people who want a small share of a share.
The idea was around on the ASX before the COVID-19 pandemic prompted amateur investing to blossom, but it is benefiting from associated tailwinds and a shift in the way younger investors put aside money and think about spending.
Bank accounts offering round ups on purchases have been available and used by younger generations — millennials and Gen Z specifically — for years, and entities such as Raiz (ASX:RZI) and Spaceship have built on this as an investment idea by enabling very small regular “micro investments”.
And while it’s taken decades to convince millennials to pay for online subscriptions, a monthly sub for Spotify or even a news service isn’t the anathema it once was.
Fractional investing has benefited from an acceptance of monthly subscriptions: traditional one-off commissions charged by brokers of $10-30 would quickly negate a regular $50-a-month investment.
But some platforms are moving to a monthly fee that makes a single monthly investment cheaper than a monthly trade through a traditional broker.
On the ASX there are two fractional investing stocks.
Raiz allows users to buy a part of an ETF, and Domacom (ASX:DCL) lets people buy a share in a property of their choice and sell out easily, unlike managed property funds.
Last year Domacom won a years-long battle with the ATO to allow retirees to sell a stake in their home to their self-managed super fund.
In recent years property has been where significant innovation has been made in Australia.
In the unlisted space, BrickX and CoVesta have a similar offering to Domacom but investors buy ‘bricks’ in properties the company has selected rather than one they’ve picked.
For equities, the creativity has been within trading platforms, following trends in the US where platforms including Stockpile, Robinhood, Betterment and Stash allow fractional investing.
Stake enables Australians to fractionally invest in US stocks as does a platform called Interactive Brokers, and eToro. Xinja’s proposed platform is targeting the same market.
For ASX stocks the outlook is slim, given that platforms must first purchase the stock and given the noted preference among younger investors for US shares and tech stocks.
Bank Australia is planning to launch Goodments, an app that matches users with investments that reflect their values, which will include some ASX companies for fractional investing.
The ability to buy small pieces doesn’t come cheap, but for some that may be outweighed by the opportunity to easily and cheaply buy growth assets.
However, platforms that enable fractional investing are also changing the way people think about paying for trades.
Raiz charges a flat fee of $2.50 a month for balances under $10,000 and 0.275 per cent a year on balances above that. That’s a 0.3 per cent fee per annum on a $9999 balance, one that gets bigger as balances get smaller.
In comparison, the Vanguard Australian Shares Index ETF, which follows the ASX300, has a 0.1 per cent fee.
Domacom’s fee is 0.88 per cent a year.
Where fees are changing is in brokerage, as platforms move to monthly subscriptions.
Platforms such as SelfWealth (ASX:SFW) or CommSec let users pay per trade ($10 for the former, $29.95 for the latter up to a certain sized trade).
Stake, eToro and co offer commission-free trading. However, they charge foreign exchange fees to get your money from Australia to the US and a range of others including a withdrawal fee and accelerated clearing.
However, Stake and Xinja’s new platform are following the US method of flat monthly fees.
From January 2021, Stake will offer a $9/month and a $19/month subscription. Xinja plans to charge $8/month.
For investors who buy and sell once or twice a year a monthly subscription is unlikely to make financial sense.
But for those buying small regular fractions of shares, a circa $100 annual fee might be worthwhile in order to gain access to the likes of Tesla, Alphabet or even Berkshire Hathaway Class A stock which trades around $US316,251.