Robinhood Is The Latest Firm To Offer Fractional Stock Trades. What’s All The Hype About?

Topline: Robinhood is the latest company to offer clients the ability to trade fractions of stocks as it joins a growing number of firms looking to attract the next generation of investors.

  • Popular investing startup Robinhood made the announcement on Wednesday, becoming the third company in the past few months to offer the feature. Charles Schwab was the first among the major brokers to offer fractional stocks.
  • Trading fractional shares isn’t an entirely new concept, particularly among fintech startups and small firms, like SoFi, Stash, Folio Investing and Motif.
  • Fractional trading allows investors to buy and sell portions of stocks, which can come in handy for younger investors who can’t afford the high price tag that comes with owning shares of companies like Amazon or Google parent Alphabet. Those shares will cost you $1,760 and $1,350, respectively.
  • Brokerages and fintech firms offering fractional trading have the same goal: Attract new investors by lowering the barrier for entry.
  • “With the addition of fractional shares, we’ll continue to improve upon our mission and open up investing for even more people,” Robinhood’s cofounder and co-chief Vlad Tenev told Forbes in a statement. “It’s an exciting next step as we continue to democratize finance and work to better serve our 10 million customers.”
  • Robinhood was last valued at $7.6 billion and has raised more than $800 million from investors like NEA, Kleiner Perkins and Sequoia, according to CNBC.

Key background: “The bigger picture is that Robinhood is now in a situation where it has to keep up with the pace of innovation,” says Ark Invest analyst Max Friedrich. In the context of the brokerage industry, large firms have increasingly leveraged their huge customer bases by adopting many of the successful features of startups who are seeking to gain market share. Friedrich points out that while Robinhood started out as one of the first movers and shakers in the industry by offering free stock trading, “over recent months we’ve seen this consolidation and movement from legacy brokerages to also offer free stock trading.” 

Schwab was the first major brokerage to eliminate trading commissions in October, setting off a chain reaction among other brokers, like TD Ameritrade, E-Trade and Interactive Brokers, to quickly do the same. As bigger brokerage firms catch up with the pace of innovation, smaller disruptors like Robinhood are feeling the pressure. “More big and small players will continue getting involved and offer similar services,” Friedrich predicts.

Crucial quotes: “Over the past year, we’ve seen increased adoption and demand … [among] investors seeking exposure to higher priced names at lower price points, who were previously shut out due to full share or round lot requirements,” says Bill Capuzzi, CEO of Apex Clearing, a custodian firm that holds securities for brokerages. “This is a clear next step as technology’s impact on investing enters a new era, so it makes sense that Robinhood is moving in this direction.”

“The trend toward stock market democratization has been going on for years, starting with the discount brokerage wars of the ’90s, leading to the eventual drop to zero commission fees, which has quickly become the effective industry standard,” says Jannick Malling, co-chief of commission-free stock trading app Public. “The next phase of democratization will be fractional investing, which I believe is the most dramatic development yet when it comes to bringing more people into the investing community.” 

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