Broker Charles Schwab to Launch “Fractional Stock” Ownership

October 24, 2019 | Alternative Investments, News

In what could be a gamechanger for RIAs and investors, Charles Schwab may introduce trading in fractions of shares.

Everyday investors are often handicapped by the minimum tradable value of a single unit of an ETF or a stock. Consider this scenario: an investor is looking to invest $100 in the market. But he’s out of luck if any of these are on the shopping list: SPDR S&P 500 (SPY) (now trading at $300 per share), Tesla (TSLA) ($294), Apple ($243), and Amazon (AMZN) (S1,779). However, Schwab’s fractional shares offer can do the trick. The investor can now buy a fraction of any of these stocks/ETF for $100.

Schwab’s fractional shares offer a body blow to mutual funds

In an interview with the WSJ recently, founder and president Charles R. Schwab revealed the online brokerage was planning to launch a fractional stock ownership scheme targeted at younger, retail investors.

Though new-fangled, boutique online brokers have already offered this facility to investors, the mainstream brokers were yet to follow suit.

Schwab’s move will undermine one of mutual funds’ key advantages – the facility to invest dollar-specific amounts. “It would be a game-changer if you could specify the dollar amount and say, ‘I want to buy, say, $100 of the Gold SPDR,” says Peter Palion, a certified financial planner at Master Plan Advisory, Inc.

Schwab’s Fractional ETF’s the real deal

Schwab’s fractional offer could also be hugely attractive to ETF investors. Investors can take exposures across a huge variety of thematic or tracker ETFs with small amounts as they build portfolios.

Mutual funds have already seen steady redemptions as money flowed out to ETFs.

Schwab’s fractional plan could make ETFs even more attractive to the legions of everyday investors.

[Related Story: UBS: Fintech Darling Robinhood’s Business Model in Serious Jeopardy ]

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