Schwab to allow fractional stock trading (WSJ)

[JAZZISCOOL]

"Charles Schwab Corp will let investors buy and sell fractions of shares in coming months as part of an effort to attract younger clients.

Founder and Chairman Charles R. Schwab told The Wall Street Journal Thursday that fractional share trading would soon be introduced, along with other several other new programs, as the online brokerage looks ahead after it eliminated trading commissions earlier this month. Mr. Schwab discussed the firm’s future after speaking about his new book, “Invested,” in New York.

“I wanted to take commissions out of the formula,” Mr. Schwab said. “We’ve been on that path for 40 years,” he said, reflecting back on the company’s start as one of the first discount brokerages. Now, he said, Schwab is focusing on efforts to win business from young people.

The move would be the first by a major online brokerage to allow investors to buy and sell fractions of stocks. Some of the most well-known and popular companies have very high price tags, making owning a share impossible for some would-be investors. A share of Amazon Inc., for example, costs $1,792."

Full article:

https://www.wsj.com/articles/schwab-in- ... ge=1&pos=1

[jhfenton]

Excellent. I hope this starts a trend. I have $11.xx in my Roth IRA that I would like to invest in one of the two Vanguard ETFs that I hold in that account.

There should be no serious impediment (besides the required IT changes) to Vanguard offering fractional trading in its own ETFs. Just allow market orders for a specific dollar amount. They should have a large enough volume and pool of their own ETFs to manage the fractional shares. They already do it for reinvested dividends.

[Jack FFR1846]

Schwab already allows fractional share trading of mutual funds. I bought 1.359 shares of SWPPX to use up all the dividends in a Roth. I don't auto invest dividends. I've never tried to buy a fractional share of a stock.

[Wiggums]

Yes, it would be nice to be able to invest the small amounts of cash left in your account. It will be Interesting to see if other large brokers add this feature.

Hopefully, there are not negative side effects to this change.

[MotoTrojan]

Schwab already allows fractional share trading of mutual funds. I bought 1.359 shares of SWPPX to use up all the dividends in a Roth. I don't auto invest dividends. I've never tried to buy a fractional share of a stock.

Pretty sure there are no brokerages that do NOT allow fractional trading of mutual funds; that is part of how mutual funds work. ETFs and stocks though would be a game-changer. M1 Finance will take some pressure from this if the brokerages start to implement slick pie-based allocations etc...

I personally would really love to see the ability to setup automatic/recurring ETF (or stock) purchases, which this mechanism would allow.

[jhfenton]

Schwab already allows fractional share trading of mutual funds. I bought 1.359 shares of SWPPX to use up all the dividends in a Roth. I don't auto invest dividends. I've never tried to buy a fractional share of a stock.

Fractional share purchases and sales of mutual funds have always been standard everywhere.

Currently you cannot directly buy or sell a fractional share of a stock or an ETF at most brokerages. You can reinvest dividends into fractional shares at most brokerages for "eligible securities." Which securities are eligible varies by broker (typically their own ETFs and other widely-owned stocks and ETFs).

Roboadvisors and a few places like M1 Finance allow fractional purchases of stocks and/or ETFs. It's easier for the roboadvisors since they're working with a fixed pool of ETFs.

[anon_investor]

Interesting, I wonder if this will lead to Vanguard allowing fractional purchases of their ETFs at Vanguard. One of the main reasons I have stuck with the traditional mutual fund admiral share class vs the ETF share class.

[HenryPorter]

This will be the end of M1 Finance if Schwab will allow market or limit order trades for fractional shares. I hope M1 responds by re-gearing and allowing limit orders for their accounts instead of the once-a-day trade window. As far as disrupting/perturbing the overall market, what do retail traders comprise in the total? And of those, how many trade fractional shares ala M1 and other brokerages? It will be interesting to see where this all morphs.

[bluquark]

Just allow market orders for a specific dollar amount.

I wonder if this is what Schwab is planning to offer. If you still have to denominate orders in terms of share count, you would still have to mess with marketable limit orders to buy funds, which is a hassle especially while the market is closed.

[JAZZISCOOL]

This will be the end of M1 Finance if Schwab will allow market or limit order trades for fractional shares. I hope M1 responds by re-gearing and allowing limit orders for their accounts instead of the once-a-day trade window. As far as disrupting/perturbing the overall market, what do retail traders comprise in the total? And of those, how many trade fractional shares ala M1 and other brokerages? It will be interesting to see where this all morphs.

In fact, M1 was mentioned in the WSJ article:

"When Schwab said this month that it would nix trading commissions, it acknowledged competitive pressure from new entrants. Digital upstarts such as Robinhood Markets Inc. helped popularize the zero-commission model in the online-brokerage business, and some others have already allowed for fractional share trading. One such company is M1 Finance LLC, a Chicago-based online brokerage that splits every share into one-one hundred thousandth of a share.

Schwab didn’t specify when the program would launch. “We’re constantly working on new services designed to appeal to our evolving client base,” a spokeswoman said. "

[arf30]

Hope this paves the way for purchase by dollar amount and auto investing.

[MichCPA]

Interesting, I wonder if this will lead to Vanguard allowing fractional purchases of their ETFs at Vanguard. One of the main reasons I have stuck with the traditional mutual fund admiral share class vs the ETF share class.

This feature would pretty much kill the traditional mutual fund. With tax free conversions, lower expenses, the same tax efficiency and pretty much now minimum, it would be pretty though to ignore.

[kosomoto]

Fascinating - you would be able to equal weight the sp500 for zero commission and zero expense ratio.

I’m getting a bit excited thinking about creating my own indexes.

[aristotelian]

Fascinating - you would be able to equal weight the sp500 for zero commission and zero expense ratio.

I’m getting a bit excited thinking about creating my own indexes.

You can already do that at M1 but I agree, it is getting easier and more widespread. I wonder if we will start to see a shift back to individual stocks now that transaction costs have gone to zero. Now the sole benefit of the index fund (aside from convenience) is diversification, but how much benefit do you get once you get above X number of stocks?

[Workable Goblin]

Now the sole benefit of the index fund (aside from convenience) is diversification, but how much benefit do you get once you get above X number of stocks?

I wouldn't discount convenience--I think nisiprius showed in another thread that it would take a gargantuan number of trades to follow the S&P 500--but I think you're right overall that zeroing out transaction costs tends to lead back to holding individual stocks once you have the right tools in place to let an investor manage their own index fund. Roboadvisors seem promising as a method of allowing an investor to manage hundreds or thousands of stocks (and bonds) without a great deal of effort, though considering that they usually charge an AUM fee you could argue, quite reasonably, that they're just an "unrolled" fund that lets you see inside the package...

[Ferdinand2014]

So Schwab is encouraging young people who don’t have enough money to buy 1 share of a stock to invest their money in individual stocks......

[Nthomas]

So Schwab is encouraging young people who don’t have enough money to buy 1 share of a stock to invest their money in individual stocks......

When I read the article I assumed it would also apply to ETFs.

[aristotelian]

So Schwab is encouraging young people who don’t have enough money to buy 1 share of a stock to invest their money in individual stocks......

Yes, they can buy $10 each of 100 stocks for less than the price of 1 share of AMZN. That is a good thing IMO.

[AlohaJoe]

Fascinating - you would be able to equal weight the sp500 for zero commission and zero expense ratio.

I’m getting a bit excited thinking about creating my own indexes.

How much money do you plan on losing every quarter when you get front-run on index composition changes?

[MotoTrojan]

Fascinating - you would be able to equal weight the sp500 for zero commission and zero expense ratio.

I’m getting a bit excited thinking about creating my own indexes.

How much money do you plan on losing every quarter when you get front-run on index composition changes?

+1. Thinking you can beat indices with low single-digit basis point expense ratios is comical.

[Nate79]

This is great news. Schwab continues to be an industry leader in cost, customer service, and offerings to their customers.

[Iridium]

Fascinating - you would be able to equal weight the sp500 for zero commission and zero expense ratio.

I’m getting a bit excited thinking about creating my own indexes.

How much money do you plan on losing every quarter when you get front-run on index composition changes?

+1. Thinking you can beat indices with low single-digit basis point expense ratios is comical.

On an after-tax basis, I wouldn't be so sure.

1) Gains in the market are concentrated on a small number of stocks. If you own the whole market as individual stocks, there is a good chance one of them is going to be a rocket that increases multifold. These are exceptional candidates for donating to charity, as practically their entire value is capital gain.

2) Asset placement can be done at the stock level. For example, the highest dividend yield stocks can be placed in retirement accounts. Whereas the stocks that have never issued a dividend get put in your taxable.

3) For employees of the largest companies, the impact of their employee stock purchase plan can be reflected in their allocations, such that a Microsoft employee might not keep any Microsoft stock in the normal account, but s/he already has appropriate exposure through employee stock purchase plans.

4) While it does not impact me, for investors in ethical funds, it will help them cover more of the market. There isn't going to be a fund that, say, considers academic publishers and nuclear power plant suppliers to be out of bounds, but is fine with poor labor relations, tobacco, military contractors, energy companies, and GMOs. Any ethical investing fund of sufficient size to make sense to invest in is going to have to target some sort common denominator ethics that is likely to be more restrictive than the particular conscience of the investor.

I do not believe the tools yet exist for an investor to reasonably index themselves but I am not laughing. There are problems in automatically rebalancing and portability. I do not believe these issues are insurmountable. Certainly the first is only a matter of a creative broker and index provider offering the service of automating it for a few basis points. The latter needs brokers to agree to in-kind transfer partial shares between each other, something easier said than done.


Edit: I wonder if tax loss harvesting and portability could be turbocharged by pairing the service of automated rebalancing with an ETF following the same index and a creation unit of just a single share. Want to tax loss harvest? Sell your highest basis lots of each stock then buy the ETF. Wait 30 days then redeem the ETF in-kind to receive a basket of securities nearly identical to the one you sold. Want to move your shares without realizing gains? Exchange your portfolio to create shares of the ETF, transfer the ETF, then redeem the ETF shares for a portfolio of shares.

[HEDGEFUNDIE]

2) Asset placement can be done at the stock level. For example, the highest dividend yield stocks can be placed in retirement accounts. Whereas the stocks that have never issued a dividend get put in your taxable.

This is a game changer and would lead to a complete rethinking of our standard BH advice on asset-location.

The tax cost on VTI is 0.5% annually. Being able to save this cost should be front-page stickied news around here.

[rascott]

This is likely a game changer at multiple levels.... Anywhere from direct indexing .....to index ETFs replacing MFs in 401ks. And lots of things in between.

If this picks up steam elsewhere (and no reason to think it won't).... index based mutual funds could be put out to pasture.

Every broker already gives you fractional shares on dividend reinvestment. Always found it odd why they wouldn't allow you to do so at purchase. I'll keep an eye on this, but Schwab may be getting 100% of my business soon.

[frugaltigris]

Are we now close to auto investing for ETFs? Is this beginning of the end of index fund era?

This can potentially bring profound changes at various levels.

Well done Schwab. Fidelity must follow.

[whodidntante]

I think this is great and I'll also avoid using it if possible. I don't want fractional shares because I am currently riding the brokerage bonus gravy train with biscuit wheels.

[Cheez-It Guy]

Vanguard should use the revenue from PAS to buy M1 Finance (at a discount since their business model is now under threat from larger competitors) and integrate their superior technology platform. Fractional shares and automatic investing are the only things stopping me from converting from mutual funds to ETFs as it is. Get on it, VG!

[effigy98]

I like the idea of creating my own ETF for ones that do not exist. M1 solves that right now. For example, why VGT does not contain Amazon or Facebook is frustrating and the share price of AMZN is a lot to dollar cost average into from paychecks if you need to buy whole shares. For my tech pie I have vanguard ETF and the few obvious tech stocks it is missing (amzn, fb, shop, etc). I think it is amazing for dividend growth investors too. It is also a lot more fun.

One thing M1 offers is leveraged cash out loans. Want to buy a car without doing a bunch of paperwork that you plan on paying off in 6 months, click a few buttons and M1 can send you up to 1/3rd of your taxable portfolio in a day or two.

[ruud]

2) Asset placement can be done at the stock level. For example, the highest dividend yield stocks can be placed in retirement accounts. Whereas the stocks that have never issued a dividend get put in your taxable.

This is a game changer and would lead to a complete rethinking of our standard BH advice on asset-location.

The tax cost on VTI is 0.5% annually. Being able to save this cost should be front-page stickied news around here.

Can't you already approximate that (somewhat) by putting VUG (growth index) in taxable and VTV (value index) in tax advantaged?

[whodidntante]

Vanguard should use the revenue from PAS to buy M1 Finance (at a discount since their business model is now under threat from larger competitors) and integrate their superior technology platform. Fractional shares and automatic investing are the only things stopping me from converting from mutual funds to ETFs as it is. Get on it, VG!

I've had no trouble getting commission-free trades for years now. M1 is still the only company offering a free robot and free pies. More people will come if you offer a free robot and pies.

[HEDGEFUNDIE]

2) Asset placement can be done at the stock level. For example, the highest dividend yield stocks can be placed in retirement accounts. Whereas the stocks that have never issued a dividend get put in your taxable.

This is a game changer and would lead to a complete rethinking of our standard BH advice on asset-location.

The tax cost on VTI is 0.5% annually. Being able to save this cost should be front-page stickied news around here.

Can't you already approximate that (somewhat) by putting VUG (growth index) in taxable and VTV (value index) in tax advantaged?

VUG still suffers from 0.3% annual tax cost at the highest bracket.

[Cheez-It Guy]

I've had no trouble getting commission-free trades for years now. M1 is still the only company offering a free robot and free pies. More people will come if you offer a free robot and pies.

Well, I want my pies made by robots. Less risk of food-borne illness.

[ruud]

Can't you already approximate that (somewhat) by putting VUG (growth index) in taxable and VTV (value index) in tax advantaged?

VUG still suffers from 0.3% annual tax cost at the highest bracket.

Didn't know the number offhand (hence the "somewhat"), but that's a smaller savings than I would have guessed.

[mathguy3021]

This is an extremely good move by Schwab to help the small investor. I will be one of the first to move part of my Roth IRA to Schwab if fractional shares of stock or ETF can be purchased in very small fractional share amounts or precise dollar amounts at zero commission cost. This allows me to construct equal weight index funds and consistently rebalance with a small amount of money. I am hoping all major brokerage firms follow this trend. Schwab has led the way with zero commissions, and now hopefully zero commission fractional shares will become a reality soon.

[jhfenton]

Per an article on ETF.com, Schwab's plan to allow fractional stock trading does not include ETFs, only individual stocks:

When ETF.com reached out to Schwab for comment, company spokesperson Erin Montgomery said in an email that while fractional stock trading should debut sometime in 2020, the company has no current plans to introduce trading of fractional ETF shares.

"We are … exploring how fractional share trading could be applied in other areas, such as with ETFs, but our focus right now is on individual stocks," she wrote.

That makes it a lot less exciting to me--completely irrelevant, in fact.

[JAZZISCOOL]

Per an article on ETF.com, Schwab's plan to allow fractional stock trading does not include ETFs, only individual stocks:

When ETF.com reached out to Schwab for comment, company spokesperson Erin Montgomery said in an email that while fractional stock trading should debut sometime in 2020, the company has no current plans to introduce trading of fractional ETF shares.

"We are … exploring how fractional share trading could be applied in other areas, such as with ETFs, but our focus right now is on individual stocks," she wrote.

That makes it a lot less exciting to me--completely irrelevant, in fact.

Thanks for the update. Perhaps they should have clarified that up front given the popularity of ETF's.

[anon_investor]

Per an article on ETF.com, Schwab's plan to allow fractional stock trading does not include ETFs, only individual stocks:

When ETF.com reached out to Schwab for comment, company spokesperson Erin Montgomery said in an email that while fractional stock trading should debut sometime in 2020, the company has no current plans to introduce trading of fractional ETF shares.

"We are … exploring how fractional share trading could be applied in other areas, such as with ETFs, but our focus right now is on individual stocks," she wrote.

That makes it a lot less exciting to me--completely irrelevant, in fact.

Thanks for the update. Perhaps they should have clarified that up front given the popularity of ETF's.

Bummer... I guess I won't be converting my Vanguard mutual funds to ETFs anytime soon... Another advantage (at least for me) that traditional mutual funds have over the ETFs is that dividend reinvestment is turned on, they are reinvested the same day they are taken out, but with ETFs, I think they are taken out and not reinvested until a few days later.

[Cash]

Per an article on ETF.com, Schwab's plan to allow fractional stock trading does not include ETFs, only individual stocks:

When ETF.com reached out to Schwab for comment, company spokesperson Erin Montgomery said in an email that while fractional stock trading should debut sometime in 2020, the company has no current plans to introduce trading of fractional ETF shares.

"We are … exploring how fractional share trading could be applied in other areas, such as with ETFs, but our focus right now is on individual stocks," she wrote.

That makes it a lot less exciting to me--completely irrelevant, in fact.

Agree

[Wiggums]

Fidelity lets clients trade fractions of stocks, battling for younger clients in the brokerage wars

https://www.cnbc.com/amp/2020/01/29/fid ... -wars.html

[ochotona]

Sounds like a lot of BS to me. I just tried to buy 1/10 of a share of NEM at Schwab.com

"It is not possible to buy fractional shares. Please correct the Quantity and try again."

[stilllurking]

Does anyone know if Schwab will accept fractional shares via ACAT from another brokerage?

[guyinlaw]

Sounds like a lot of BS to me. I just tried to buy 1/10 of a share of NEM at Schwab.com

"It is not possible to buy fractional shares. Please correct the Quantity and try again."

Buying fractional shares is actually buying dollar amounts.. I am not sure if they have activated this yet. It will be nice to top up my Roth all the way..

Also dividend reinvesting will be nice with this.

Has anyone seen this work for them?

[abuss368]

I did read about this in The Wall Street Journal. I would suspect Vanguard (and others) will get there soon enough.

Thank you for sharing.

[Doc]

Schwab initiated reinvestment of ETF dividends several weeks ago. I can sell those fractional shares apparently. (My test order was accepted but I did not execute it.) Purchase of fractonal shares is not yet available.

[tenkuky]

Does anyone know if Schwab will accept fractional shares via ACAT from another brokerage?

Yes, this I did years ago from TDA to Schwab. Didn't have any leftover pennies as a result.

[abuss368]

I would not be surprised at some point with Vanguard if we are all moved to the new brokerage platform and unfortunately off the mutual fund platform. Then discussions on fractional shares may become more popular.

[1789]

I would not be surprised at some point with Vanguard if we are all moved to the new brokerage platform and unfortunately off the mutual fund platform. Then discussions on fractional shares may become more popular.

Vanguard will do this. No question about it. It is called competition and giving more choices to customers

[Doc]

Vanguard will do this. No question about it. It is called competition and giving more choices to customers

Before or after they start answering the phone on the weekend?

[1789]

Vanguard will do this. No question about it. It is called competition and giving more choices to customers

Before or after they start answering the phone on the weekend?

I think that one will take some time. Maybe they need to increase hiring

[jhfenton]

Vanguard will do this. No question about it. It is called competition and giving more choices to customers

Before or after they start answering the phone on the weekend?

Are you going to pay for them to answer the phones on the weekend? Because I don't want to pay for that.