Fractional Shares
blog.robinhood.com
blog.robinhood.com
Don't get me wrong, I love some of what they're doing....I just don't trust them with my money.
I see a lot of people saying things like "I don't trust Robinhood with my money". I am curious what scenario you see unfolding with Robinhood that could result in loss of your assets. Especially scenarios impacting Robinhood uniquely. Are you aware that Robinhood, as well as virtually every other brokerage in America, provides SIPC insurance up to 500K USD on all (non-crypto) investment accounts? This is on-par with the same kind of protections you get with any FDIC-insured checking or savings account. In order to even qualify for this kind of insurance, Robinhood had to essentially sell its soul to the various auditors and regulators. Regulations around these kinds of businesses are incredibly stringent. You would probably feel a lot more comfortable with any arbitrary brokerage if you had to sit through one of their audits, or were simply made aware of how extensive it is.
There is certainly a lot of "controversy" around Robinhood in the press lately (surely no competitor would stand to gain from running hit pieces against a zero commission broker), but from a purely academic standpoint, it is just noise and doesn't impact the ability of the firm to carry out its fiduciary duties in a reliable and consistent manner.
What I would say is that I just don't trust Robinhood as a company. They feel scummy to me, and their marketing and UX pushes practices that I would not consider good investment advice. I can only assume that pushing frequent trading (and poorly-described options trading) on unsophisticated investors makes more money for them. But it's likely at the expense of those investors. Even if I "know better" and could just take advantage of the platform as-is, I don't care to support that behavior.
Take that and pile that on top of -- for example -- their misleading and factually incorrect announcement about their quickly-pulled cash management product last year... yeah, no thanks, I'll pass.
Push notifications are a prime example of this. They encourage users to act on short term news rather company fundamentals, which is a dangerous mindset for novice investors. Fortunately for them they've been operating solely during favorable market conditions but when the market does crash I fully expect them to face backlash.
While similar, SIPC is not "on-par" with FDIC.
With FDIC, the bank is taken over Friday afternoon and your cash is available Monday morning.
With SIPC, it could very easily be five years before you have access to your assets again.
The difference in the value of the insurance also means the regulatory scrutiny behind SIPC is far lower.
The mere presence of extensive auditing and regulation does not mean that it is effective.
On the other hand, I still feel like it's a big jump to go from there to "...and so I don't trust them with my money". Have they lost anyone's money? Do you think they're in some real danger of shutting down and taking people's money with them? "These idiots keep failing to properly calculate margin requirements" is a pretty damning thing to say about a brokerage, but....
Brokerages are pretty heavily regulated. Why do you think your money wouldn't be safe?
This is without even going into the stupidity that was infinite leverage and the CEOs response afterwards. That is an entirely different level of incompetence that would need a novel to fully expand upon
Can you elaborate on this a bit and/or share article(s)?
https://www.reddit.com/r/wallstreetbets/comments/dpnzup/i_re... (Reg T violation)
https://www.theverge.com/2018/12/15/18142319/robinhood-finan... (Lying about their to be released cash management feature being SIPC insured that SIPC forced them to walk back)
The entire legal system around equity investment is built around these concepts, and while you might take a different approach to the whole thing if you could "do a full re-write of the codebase", that's not really how laws work. There's also the fact that the same or very similar rules are applied worldwide, allowing like-for-like laws to apply cross borders. A Chinese share can be described by US laws. Do you know how hard it would be to toss all that global legal framework out and replace it with something else?
And you've not really explained why you think your system is better, either. I'd say the discrete units of shares that make ownership laws simpler are worth the hassle, on their own.
(I do not work for Folio)
(I do not work for either. I've used Robinhood for 4 years.)
Edit: Looks like Robinhood moved out of Apex to their own clearing.
EDIT: After some Googling it appears that SIPC does protect securities that weren't actually purchased due to fraud or mismanagement. IANAL so I don't know if that would apply to this specific situation, but they have protected other non-owners before like in the case of Bernie Madoff.
A broker which just has pretend stock ownership as a book entry with the broker is called a "bucket shop".[1] A crime in most US states since the 1920s.
[1] https://en.wikipedia.org/wiki/Bucket_shop_(stock_market)
When I heard of Robinhood I thought it would fail for sure... I guess that shows how much I can predict startup success.
The $0 commission is now pretty universal, and most brokerages are pushing better mobile apps. I don’t really trade from my phone, but you have to admit it’s convenient for when you’re not always near a desktop.
It feels very incremental to me.
It also feels like a feature that is representative of something that would only happen at the "top" of the market.
For a teenager who wants to invest $100 to "dip their toes in" when a share of Amazon is over $1,700?!?! And Google over $1,300?
Back in the days when stock regularly split it wasn't a big issue. But now that a bunch of companies think it's somehow unfashionable to split their stock (e.g. Amazon and Google), all this does is exclude smaller investors. Fractional shares solves this problem.
A single share of stock shouldn't cost more than a MacBook, sheesh.
So yeah, I do want to encourage my teenager to buy stock in individual companies. Mostly because he doesn't have a lot of money to lose, and its a great way to learn.
Here's what really happened: He bought a bunch of kooky stocks because he "liked the name". That did predictably terribly. Then he bought a couple blue chip companies, lost interest and drifted into the black. If you buy individual stocks and hold them, on average you will make money. You would usually do better with an ETF too. I think it was a good lesson that patience is better than trying to outsmart markets.
I started investing in middle school when the social studies teacher enrolled all of his classrooms into a virtual stock market simulation. Everyone starts with 100k, must own a minimum of 20 stocks on any given day, and tries to make the most within a set amount of weeks. Short-selling is included. I don't remember how well I did but I got an ornate Dominos Pizza gift certificate (which I never spent because it looked so beautiful) so I must have done well. That was 13 years ago. Today, I have a 40k Robinhood investment account which is enough for a home down payment and I plan to use it to buy a modest ~200k home in a few months.
I outperformed significantly in my early 3 years of investing with real money with a 38% return. However I have underperformed in the last 1 year and thus underperformed the market overall with an 18% overall (4-year) return not including dividends. This is because my favorite investment data app, StockGuru Pro, that cost $10 was discontinued and I don't have a suitable replacement (at all). I expect to underperform in the future unless I find a well-priced replacement or cough up the hundreds of dollars for better investment data. The ICE buyout of the NYSE has caused the price of market data to skyrocket which lead to that app's discontinuation.
The wins I experienced at a young age were very positive because it gave me a reason to save my money instead of spending it on all the things I wanted. Savings account interest rates of 0.01 to 2% interest isn't motivating at all to save because it takes more than 36 years to double money at that rate. If it weren't for learning to invest at an early age, I'd be just like the rest of the average Americans. The 50th percentile for my age (27) has a net worth of $5000 and I would be average with $5000 too if I didn't have that reason to save!
It also provided a good learning experience from which I have formed 5 principles:
1) Take calculated risks
2) Protect your principal but it's okay to risk the interest. (Phrased another way: don't lose money.)
3) Don't put all of your eggs into one basket. Diversify!
4) Don't use margin if you don't know what a margin call is.
5) Options are for viewing, watching, and analysing but not for trading (even if Robinhood makes trading them free). 90% of people lose money trading options.
Overall, an anecdotal positive experience here that I'm happy to share but with a small sample size of one.
To paraphrase Warren Buffett's investment advice, if you have a high IQ, donate the extra points to someone else because what you need more is a strong stomach (for gut-wrenching volatility).
If emotions are a part of your decision, you've already lost the game. I get that humans are emotional creatures, but if you start making investment decisions based on panic and emotions, it doesn't matter if you've been buying index funds or individual stocks; you're going to perform poorly and likely lose some money either way.
I agree. Hacker News readers are more logic based but the rest of the world is more emotional based. For most people, the emotional half of the brain dominates the logical half of the brain. I think we can agree that being invested in a diverse basket of 20+ stocks with 5% or less of the portfolio invested in each is regarded as a pretty safe bet. I also think we can agree that anyone who invests will do better in the long run than people who don't invest.
The news commonly sells convincing chichen-little fear that the sky is falling, the market's gonna crash, and we should all flock to gold. But I know with higher certainty that Amazon will keep shipping packages, Target will keep selling merchandise, Apple will keep selling more iPhones, and VISA cards will keep collecting interchange fees.
We can debate though whether it's better to hold an index fund you might panic sell or individual stocks that you plan to hold forever.
Once upon a time Sears, Roebuck and Company was the country's largest retailer. Much more recently, Motorola and Blackberry sold millions of phones and Apple didn't.
individual stocks that you plan to hold forever.
Once upon a time people thought you could own the Nifty Fifty[1] stocks forever. You would probably have been better off putting your money in an index fund. E.g. what's a recent price quote on Eastman Kodak?
The multi-baggers in the portfolio such as: 4x gains in Netflix, 4x gains in Amazon, 3x gains in Microsoft, and 11x gains in Shopify over the last 5 years will have outweighed GE dropping 50%, GM dropping 1x*, Seers dropping 1x, and Kodak dropping 85%.
I'm not as familiar with the Nifty 50 probably because I'm younger. Investopedia says it was the popular large-cap NYSE stocks of the 1960s and 1970s without an official list. but could also mean one of at least 6 indexes on the indian stock exchange[2]. Gurufocus claims they were Large Cap Growth Stocks with an average P/E Ratio of 42x.[3] Large caps are known to underperform overall in the long run but outperform more frequently in shorter 1 year time frames.[1] The same is true with growth stocks vs value stocks.
It seems to me that the reason the Nifty 50 "lost 80% to 90%" [3] is because it was overweight in large cap and growth stocks while neglecting value stocks and small cap stocks.[1] This is evidenced by the S&P 500 growing 6.78% per year annualized from 1960 to 1979 and showing a positive return over every 15 year period in recorded stock market history.[4]
[1] http://www.moneychimp.com/articles/index_funds/why_sv.htm
[2] https://www.investopedia.com/ask/answers/08/nifty-fifty-50.a...
[3] https://www.gurufocus.com/news/594692/faang-plus-m-and-the-s...
People need to be allowed to make mistakes with low risk.
Mainstream personal finance advice is pitiful.
There's wide consensus that ETFs are a bubble. On the other hand, the notion that buying an individual stock is equivalent to gambling is nonsense.
Beating the index is a zero-sum game, for every winner there must be a loser. Of course you can make educated choices based on the fundamentals but the same is true for sports betting too. Unlike sports betting, you are directly competing against a large number of pretty smart people who play this zero-sum game as a full time job. And some of them even have inside information.
Not that it's impossible to win of course. I can easily imagine someone with deep expertise in a certain area having a key insight about a specific company that others don't, or someone who analyzes company balance sheets and business fundamentals to come up with an independent valuation being above-average at that. It's hard to imagine that either of these groups represent the average person who will trade fractional shares on Robin Hood though.
(This is not hypothetical it is actually happening)
Which could be, but isn't an argument for buying individual stocks instead of the index, since that doesn't avoid the problem.
In one view of the market, this is what all those hedge funds are paid to do. They keep the prices correct and extract some money, while everyone else indexes and pays them a small fraction of their returns. Of course, hedge funds aren't getting much of that pie these days.
Companies always face a reckoning point, on their individual timelines.
It's just arbitrage 101. Nothing stays mispriced forever. And the sooner the "other side" figures it out, the quicker prices correct -- so you've got to be fast. Which is exactly what sophisticated investors are.
Now in this thread people are saying multiple such platforms exist. Did I make a mistake or get something wrong? Or are they applying some kind of workaround? I can't remember why I thought it wasn't allowed.
how did you somehow decide (unilaterally) it is illegal?
And is this something that exists outside of Robinhood?
- Sofi: https://www.sofi.com/invest/fractional-shares/
- Schwab: https://www.wsj.com/articles/schwab-in-bid-for-younger-clien...
I'm not totally sure how it's structured, but I imagine RH "owns" the shares and offers you the corresponding fractional amount of value/dividends, etc.
My understanding is that the way this works is that the broker will generally already have an inventory of all of the stocks that are regularly traded through them and simply carve up your fractional allocation from this inventory. When you purchase shares through a broker they can simply sell you the shares directly out of their inventory if they can match the market price. They will even get a small incentive to do this since it produces order flow (volume) without hitting the exchange directly.
This also helps with order clearing (the T+3 rule for ownership transfer). Since the broker is selling out of their inventory, it is virtually guaranteed that your order will clear. When transferring shares between institutions, it's possible that this process will fail and you will be notified that your order wasn't able to be fulfilled. It's rare, but can happen.
While purchasing fractional shares outright is somewhat new, the concept itself has been around for a while and I've had DRIPs at multiple different brokers. I was even able to get fractional shares of high priced preferred stocks going for $1,000+ market per share.
Anyways, that's my experience.
Most countries are now T+2. The USA has been so for over two years.
There's also DRIP (Divident ReInvestment Plan) plans, a feature brokerages offer to allow fractional reinvestment of dividends.
Not sure how it's actually implemented as a financial product.
Fractional shares through DRIP is something else really as you can’t purchase them directly.
I’d be interested to know how it works too, but it could be as simple as the brokerage buys 1 share when you ask for 0.5 then keeps the other half on the books, sells the other half to someone else.
I'd imagine similar to all of the other brokerage accounts that allow for fractional shares either via direct purchase or dividend reinvestment purchases. RH's competitor SoFi has had fractional shares for a while now, I would imagine it is set up similar.
Yes, it exists in every other broker. RH is just slow
No.