Robinhood, the stock trading app that pioneered free commissions, will allow users to buy and sell portions of shares of “thousands of stocks and ETFs” with as little as $1.
While a single share of a company can cost hundreds or thousands of dollars — Amazon trades at around $1,700 per share — so-called fractional investing lets investors without a lot of money buy part of a stock share, which they can build on over time. “We believe that fractional shares will open up investing for more people,” Robinhood said in a press release.
The new feature is expected to start rolling out next week, and investors will be able to buy as little as one-millionth of a share for $1. As noted above, Robinhood does not charge for buying or selling stock.
The stock trading app also announced two other features that will be implemented in early 2020: Automatic dividend reinvestment and the ability to schedule recurring investments.
Don’t Get Swept Up In The Hype
Now that many investment companies have started offering commission-free trades and fee-free ETFs, fractional trading for individual stocks and ETFs might be the next frontier in the low-cost investing arms race. Charles Schwab announced at the end of October that it would allow customers to buy fractional shares of stocks. Fin tech companies SoFi and Stash also feature fractional trades.
That’s good for investors without a lot of money who would like to buy shares in expensive companies like Amazon or Alphabet. It’s also a smart way for any investor to test out a company before committing a large amount of money.
But experts say to be careful. If you aren’t already investing in a diverse range of companies — typically via an index fund — that should be your priority before you devote a significant amount of money to investing in a single company, Greg McBride, chief financial analyst at Bankrate, tells CNBC Make It.
“The individual investor is better suited by investing in mutual funds and exchange-traded funds,” says McBride. “But the lure of individual stocks is always there. On some level, so is the belief that doing so enables the investor to beat the market, which has proven not to be true.”
Investing in individual stocks only, in other words, is not a smart strategy. That said, Robinhood also allowing users to buy fractional shares of ETFs is especially good news, because ETFs typically have lower expense ratios than mutual funds, and provide the diversification that stock-picking typically does not. That’s the best of both worlds.
“You can easily construct a well-diversified portfolio with a modest amount of money by buying exchange-traded funds,” says McBride. “Every dollar is going to work for you.”