I'll Take Tesla Stock for $1, Please - Jason Zweig [View all]

Stocks are near record highs, but they’re finally getting cheaper to buy. No longer do investors need to buy a minimum of 100 shares at a time or even one full share, often at prohibitive cost. Fractional-share trading enables you to purchase a sliver of a share with as little as $1, putting a stake in single stocks within anyone’s reach. As with any technology, whether that’s good or bad depends on how you use it.

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Let’s say you want to invest in Tesla Inc., which joins the S&P 500 next week. 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. Earlier this month, the Securities and Exchange Commission adopted rules redefining a “round lot,” which has long been 100 shares. From now on, it will consist of 100 shares only for stocks priced up to $250. At higher prices, the size of a round lot drops to 40 shares, then 10. Above $10,000, a single share will constitute a round lot.

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Today, fractional shares enable you to build a homemade diversified portfolio, one stock at a time, even with the tiniest sums.

Some small investors want to buy stocks with high prices, such as Amazon, but experience “sticker shock” at paying thousands of dollars apiece, says Neesha Hathi, chief digital officer at Schwab. Other, larger investors want to set up a gift or starter account for their children or grandchildren with a few hundred dollars or less. At Schwab’s minimum of $5 per stock, an investor “can diversify even if you’re only doing $50,” says Ms. Hathi. The average buy order in Schwab’s fractional service is about $300. At Fidelity, more than 700,000 customers have invested in fractional shares since the firm began offering them in February, says a spokesman.

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Being able to own dozens of stocks at a time with as little as $1 in each can be addicting, says New York University cultural anthropologist Natasha Schüll, author of the book “Addiction by Design: Machine Gambling in Las Vegas.” In what she calls nanomonetization, casinos and sports-betting platforms break a single event into myriad opportunities for speculation. Slot machines, which used to have three reels, now often offer the opportunity to bet on 20 lines or more at once. “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,” says Prof. Schüll. “The more time you spend on the device, the more likely you are to have a ‘slow bleed’ to zero.”

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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.

https://www.wsj.com/articles/ill-take-tesla-for-1-please-fractional-shares-11608307055 (subscription)