I understand that stock splits are meant to make stocks more affordable for more investors but if platforms allow fractional shares like Robinhood, does this matter as much? If theoretically more platforms supported fractional shares, would stock splits matter less and less?
In: Economics
No, not as much. It’s just not every platform does fractional shares and fractional shares can limit who you can sell to.
there is a mental aspect to stock pricing as well……there are a lot of people that thing 1100/share is “too high” but 100/share is perfect…..nevermind the pie has been cut into 10x as many pieces now. behavioral finances is rapidly helping to explain many things left fuzzy by traditional economics
fractional shares are still not widely available; but they certainly do help solve the problems otherwise fixed by splits
My understanding and I am sure I may be wrong but….
Fractional shares are more of an investment through a company that owns the whole stock. This would be like a stock costs $100 but you only have $50, I have the other $50 so we both own half a share. You are limited to what you can do with this share because I need to agree to sell so you can make your money liquid again. For the large firms like Charles Schwabb etc this may be less of a concern as there are likely always someone wanting to sell.
Stock Splits are exactly what it sounds like. It takes a $100 share and makes it into two separate $50 shares so you can buy and own it completely. Therefore not needing a larger firm to split the costs and you are more free to do with it what you want.
not really for standard buy/sell but it does make derivatives affordable by lowering the cost of the contract. How much this expands the derivatives market though and what it does to the valuation of the stock is debatable
Fractional shares are not a standard. You can not register as a shareholder at a company using fractional shares and you can not trade on the stock exchange with fractional shares. So brokers can not trade fractional shares between them. Fractional shares are something that is implemented internally at a broker. They basically find two or more clients who wants to buy fractional shares and then the broker buy the full share and splits the ownership between the clients. It is theoretically possible for two different brokers to allow trades of fractional shares between them but it would be a bit messy as those trades could not be fulfilled and had to be reversed at some point or made into full shares with other trades. So for now we need stock splits.
Options contracts only deal in lots of 100 full shares. While individual investors don’t often dabble in options (most shouldn’t), options trading is huge in the institutional investor world.
Stock price is a factor if a price-weighted index is considering a company for inclusion in that index.
Also as someone else mentioned already the underlying price affects the options market.
A fractional share exposes you to price of the underlying asset. It is not clear that it affords you the same rights as a shareholder. If you have shares at a brokerage account, you are the beneficial owner, not the actual.
Fractional shares is more of a gimmick. I mean 1 share costs at most a few hundred bucks?
So big investors want to buy thousands of shares, and if no one is selling them, they can’t. The stock split creates more shares to make the system fluid for big investors. The ancillary effect that it helps the little investor is gravy.
So yes, stock splits are important for this reason. The number of shares available puts a soft cap on the number of investors you can have.
Stock splits are like buying a pizza and cutting it into more slices. You still have the same amount of pizza, but it’s more manageable to eat. In theory, with fractional shares you could just buy what you want anyway, so splits may seem less important. But they can still hype up a stock or make it more psychologically appealing because it “feels” cheaper per share. Plus, not everyone uses fractional shares or platforms like Robinhood.
Latest Answers