You can own all of it — one piece at a time
Have you heard about the Stanford Professor who turned $100,000 into $1,000,000,000? David Cheriton, a computer sciences professor, met Larry Page and Sergey Brin while they were PhD students. Cheriton was impressed with Page and Brin’s business plan and gave them some invaluable advice: “Money doesn’t turn anything into a company. It means you have something in your bank account until you’ve spent it.” Building a company with real value requires a commitment to a long-term vision for turning their cash into a company with sustainably growing value. Page and Brin took the advice to heart, and Cheriton ultimately invested $100,000 in their startup, Google. Today, Cheriton’s investment in Google is worth ~$1 billion, and Alphabet’s market cap is ~$650 billion.
There is an important lesson here: Building wealth is a long-term process that requires a vision for turning cash into investments with steadily growing value.
Owning and building value
Today, shares of Alphabet (Google’s parent company) cost nearly $1,000 a piece. While this is great for Mssrs. Cheriton, Page and Brin, the lofty share prices of companies like Alphabet and Amazon, combined with the increasing unpopularity of stock splits, have made owning parts of these tech giants inaccessible to most of the public.
So, what do you do if you want to invest in one of these companies, but don’t have access to millions of dollars . . . or a time machine?
Last month our CEO Brian Barnes was featured in a U.S. News & World Report article on “How to Buy Sky-High Stocks.” For many people who were reading about M1 Finance for the first time, it had to be really eye opening when Brian began discussing fractional shares, and how M1 Finance makes the seemingly impossible — possible.
Upon writing this blog post, Amazon and Alphabet (Class A & Class C) share prices are over $900 each, making the scenario played out in the article even more daunting. But, the point remains the same: how can the average person even remotely dream of owning a share of what are some of the very best performing stocks? The answer is Fractional Shares.
Why do fractional shares matter?
For years, many corporate executives and market structure theorists agreed that the ideal share price was around $100.* If the share price got too high, the company would split the current shares into smaller shares with a lower price. For example, if you had one share of Company A worth $1000, and the company did a 1:10 split, you would get back ten shares worth $100 each. Your total investment is still worth $1000, but now you have ten shares instead of one.
Then, at some point in the recent past, everyone decided that stock splits were irrational. The logic went something like this: why does it matter if I own 10 shares worth $100, or one share worth $1,000? Since corporate executives behaving irrationally is generally viewed by investors as bad, stock splits became unpopular.
For most big funds and wealthy investors, nothing really changed. They held fewer shares that had higher prices, but essentially business continued the same. But, for smaller investors, this presented a problem. You see, most brokers limit investors to buying and selling whole shares. So, if you used to have 5 shares of Company A worth a total of $500, and now a single share of Company A cost $1,000 – if you wanted to invest another $100 in Company A, your broker would tell you “Tough luck, go make some more money.” This is where Fractional Shares come in handy.
What are fractional shares?
Fractional Shares are exactly what their name implies, fractions of whole shares of a company. Fractional shares are often described as pieces of a pie. Imagine you’re walking around the city, and you’re hungry. You find a shop that sells pies for $1,000. But you don’t want a whole pie, you just want a slice of pie. At this store, only people willing to spend $1,000 on pie would be able to taste it. Fractional Shares offer flexibility to investors by letting them have access to buying just a slice of the pie. If you only have $1, you can get one slice; if you only have $10, you can get 10 slices. Add a consistent schedule of purchasing those fractional slices and you will eventually have an entire pie.
Are fractional shares new?
No, people who are invested in Dividend Reinvestment Plans will be familiar with fractional shares, the difference with M1 is that we allow you to easily buy and sell fractional shares directly through our platform. You don’t have to own a bunch of full shares first and sign up for a DRIP program. Anyone can buy any piece of any security from the NYSE, NASDAQ and BATS exchanges with M1.
How do they work?
The fractional share provides investors with the opportunity to own a stock that has a high price per share. Investors can still invest at a level that is comfortable for their financial situation and build a diversified portfolio even if they don’t have a lot of cash.
Fractional shares allow investors to:
- Consider stocks that have high prices per share
- Build toward growth with a steady investment approach and recurring contributions
- Utilize whatever cash they may have available
- Receive dividends
- Participate in stock splits and mergers
Those brokers that may offer fractional shares often charge a fee for every fractional transaction, which really seems to undermine the purpose of buying a fractional in the first place. Thankfully, there are other options to buying fractional shares.
Fractional shares at M1 Finance
At M1 Finance, we believe you should be able to buy any stock you choose. No matter how expensive a share may be — you can own it! With a recurring funding approach at M1, we make it easy to accumulate wealth over time with even small contributions, using fractional shares. There’s no commission for buying and selling fractional shares, and we will trade at the market price of a full share.
Another benefit is that Fractional Shares help keep your portfolio positions allocated as close to your targets as possible. This is beneficial for investors big and small, as it helps ensure that you don’t become unintentionally overweighted. At M1 Finance, our dynamic rebalancing algorithm uses fractional shares to maintain your portfolio positions more closely aligned to their target allocations. For example, if your portfolio has $50,000 total, and you want 1% of it invested in Amazon, an ordinary broker would buy you 1 full share of Amazon at ~$1,000. This would actually represent 2% of your total portfolio, DOUBLE your desired allocation. With M1 Finance, we ensure that you get a ½ share of Amazon, keeping your position exactly at the 1% level you requested.
When you think about the advice that Cheriton gave Brin and Page, you can see the parallels to investing with fractional shares. The path to long term value requires a commitment to a vision for turning cash into sustainable value. Fractional share investing allows you to put that advice to work on your personal finances – when you add in the possibility of automation at M1, auto rebalancing, auto deductions and auto payments – and you can easily see how even a small daily or weekly commitment to saving cash and investing it will put you on the path to building a stable a financial future.
*For more on why this was the case, see this article as well as this one by Matt Levine, and this response to the first piece by Michael Friedman, both people who are smarter than I am, and whose writings I highly encourage you to read.