You open a trading app on your phone and spot a stock that trades at $2,000 per share. That price used to be a deterrent to small investors. But not today.
Fractional share trading lets you buy a tiny slice for maybe just $20. Simple. Safe. Or is it?
Historically, when companies announced a stock split (which increases the number of shares while reducing the share price), many investors rushed in, treating the new lower sticker price as a real bargain.
But a $100 stock “splitting” to $10 doesn’t change the underlying company’s value. Yet trading activity around stock splits indicated that investors irrationally piled into the stock.
This is attributed to something called nominal price illusion: the perception that a stock is a better value simply because the share price is lower, without regard to the valuation.
A new paper published earlier this year in The Journal of Behavioral Finance looked at innovations at discount brokerages – think zero-commission trading and gamified notifications – and whether these would exacerbate or reduce irrational trading behaviours.
Fractional trading was a double-edged sword.
The authors discovered that once trading platforms introduced fractional shares, the rush to scoop up “cheap” stocks lost steam. Why? Because suddenly everyone could own a piece of expensive stocks, too. If you can invest small amounts in a $2,000 stock, there’s no need to chase a split stock just because its per-share price looks friendlier.
At first glance, that might sound great for everyday investors. It suggests we’re not swayed by mere sticker prices. It also suggests a new level of inclusivity. Investors with small budgets can try their hand at premium companies they once saw as off limits.
But there’s a hidden cost. While fractional trading kills one source of irrational behaviour, it can exacerbate others. By removing the natural barrier of affordability, these platforms encourage riskier behaviours across the board.
The researchers describe brokerage platforms that cater to the next generation of retail traders – through portable trading apps with commission-free trading, fractional share trading and interfaces that use psychology to increase trading volume – as “neobrokers.” The platforms have gamified the experience.
Bright alerts, confetti or a “Top Mover” banner can push us to trade with a single tap. An influencer shouts, “This stock is going to the moon!” We then scramble to buy in even if we can only spare a few dollars. With fractional shares, that’s all it takes.
A lofty share price used to trigger real caution. Am I willing to put this much money into one company? That question often slowed us down. Now the question becomes, “Do I have $10 to spare?” and the answer is usually yes.
The result is a market full of people who own small stakes in many big-ticket names, sometimes without pausing to ask if those stocks belong in their portfolios at all.
A prime example is the collapse of “cheap stock mania” itself. As the research suggested, it vanished once people could buy fragments of pricier shares, proving that the old frenzy was more about budgets than genuine analysis.
So, we’ve sidestepped one form of impulsive trading only to usher in a broader, frictionless approach to everything else. That’s a shift worth noting. Yes, it democratizes markets. But it also risks further turning them into digital casinos.
Heck, Robinhood (a trading platform in the United States) has already launched a hub that allows users to bet on election outcomes and sports events on the platform. I can only hope that innovation doesn’t get exported to Canadian brokerages, but if it does I would support a tariff on that.
Is fractional ownership inherently dangerous? Not if used correctly. It can help small-time investors build a modestly diversified portfolio over time.
It might entice some people to start investing for the first time. Some of these new investors might eventually gravitate to low maintenance, low-cost, globally-diversified, asset allocation index funds.
But while there is more choice than ever for investors, there’s also more noise and the clinical use of psychology to induce profits for the industry under the banner of democratization.
Fractional share trading frees us from illusions about share price but it also open the door to quick-trigger decisions. I don’t advocate banning fractional share trading or rolling back the clock. The upsides are clear, especially for people who once felt excluded from the market.
However, if you plan to buy in fractions, stop and think. Are you making a move because you’ve done the research or because an app’s design nudges you toward that shiny “buy” button?
Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.
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