You may have seen the ads from banks suggesting investors should buy fractions of a share of a company. Normally, I applaud anybody who thinks on the margin. This post applies marginal thinking to this suggestion and argues that, with one exception, buying a fraction of a share displays ignorance or narrowness of thinking.
People may want to invest in the Magnificent Seven, Bitcoin, Ethereum, Constellation Software (current price is about C$3,900) or Berkshire Hathaway (Warren’s Buffett’s company; current price of an A class share is about US$750,000) because they are in the news often, but buying one unit is beyond their budget. So, allowing people to buy fractions and mixtures is slightly better than the usual advice from investment advisors, which is Buy, Sell or Hold.
The difference between marginal changes being possible and being relevant is all about costs and benefits.
TD Bank identifies four supposed benefits of fractional shares: being able to buy something in a larger set of companies; more effective diversification; “make the most of your money”; and “trade on your terms”. I will ignore the last two since they seem more like marketing jargon and less like financial insight which leads to investing wisely or optimally.
In my opinion, people most likely to buy fractional shares have little money and little experience. Since buying 500.78 shares seems unlikely, the practical question is whether the difference between 1 share vs. 0.78 shares is relevant to those types of investors. I suggest not, for two reasons. People with little spare cash may need to access savings quickly and the extra trading fees might overwhelm any returns to investing. For people with unstable jobs and limited income, putting money into an Emergency Fund or an FU Fund may be a better choice.
The exception to this logic might be parents encouraging children to become financially literate. Few parents have the cash to allow their children to play with the famous assets listed above.
A child can follow three or five stocks and the benefits would be mostly non-financial. Buying some of Disney, Spin Master (“TOY” is their ticker) or a clothing company or all three leads to teachable moments. For example, if Spin Master makes the this year’s hot toy during Christmas then the parent can ask “What would be the effect of this news on the stock price?”. If the child wants to do analysis then the parent can ask “Why are you not willing to invest in Disney when so many other people are?
People learning the costs and benefit of different investment strategies are unlikely to know whether they are investing optimally. Therefore, an even better answer to the question of marginal costs and marginal benefits considers other available alternatives. For example,
- open a practice trading account at a bank with “$100,000” of play money.
- buy a professionally managed mutual fund or ETF with low fees and read all of their documentation.
Especially the first alternative would be more instructive to new investors than trying to decipher the well-written hype about which one stock deserves all of your money (i.e., because it claims to be the next Nvidia or Apple or …).
There is much to learn about investing. Time is important since the logic of compound interest shows how investing a little, often and early in life produces surprisingly large wealth later, if you are patient. Thinking about the difference between 0.99 shares and 1.00 share is possible, but wise decisions account for marginal costs and marginal benefits more thoughtfully.
5 Basic Principles of Economics 
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