The Pros and Cons of Fractional Share Trading

The Pros and Cons of Fractional Share Trading

In a recent Wall Street Journalarticle, columnist Jason Zweig explains how fractional-share trading puts a stake in single stocks—which may otherwise be too expensive—within “anyone’s reach,” but adds, “As with any technology, whether that’s good or bad depends on how you use it.”

“Let’s say you want to invest in Tesla,” Zweig writes, “…but you can’t spare nearly $70,000 to buy 100 shares—or even almost $700 to buy one. At several leading brokerage firms, you can put up $5 or less and buy about 1/120th of a share, commission-free.”

But Zweig adds, “Fractional trading has a dark side,” citing comments from New York University cultural anthropologist Natasha Schüll, who argues that the practice can be “addicting.”

In what she calls nanomonetization, Professor Schull explains how casinos and sports-betting platforms break a single event into myriad opportunities for speculation. Slot machines, for example, which used to have three reels, now often sport 20 or more. She notes, “That way you’re almost always winning on some lines even though you’re losing overall, which encourages you to play more often and play longer. The more time you spend on the device, the more likely you are to have a ‘slow bleed’ to zero.”

Zweig concludes, “Fractional shares have enormous potential for introducing millions of fledgling investors to stocks. They also could help enable almost anyone to design a custom index fund that can encourage long-term investing at near-zero cost and high tax efficiency. But there’s a fine line between using them and abusing them.”