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What are fractional shares and why do they matter?

Have you ever heard the term 'stock split' and wondered, "what are these financial shenanigans"? Or wondered why one share of Berkshire Hathaway stock costs more than the average house? For more than 200 years, the price of a company's stock in the US informed a potential investor how much money they needed to have to buy one share of the company. As you can quickly see, not many people could afford a share of Berkshire Hathaway.

Even some of the most popular stocks in the world like Amazon, Alphabet (Google) and Tesla have soared well above a thousand dollars a share. These companies manipulate the cost per share by declaring how many shares are available. Some companies, like Ford for instance, frequently do stock splits to make sure that the cost per share is affordable for an average American citizen, while others decide to keep the cost per share very high as to create a shareholder group of only wealthy or institutional investors.

In the past five years, however, a new technology has turned the very concept of one share on its head. Two securities clearing agencies, APEX and DriveWealth aimed to popularize a technology called fractional share trading. It allows you to buy based on dollars instead of shares. Perhaps unsurprisingly, investing in terms of dollars resonates with less sophisticated investors much more than the concept of shares. It also democratizes access to the stock market by letting you trade with as little as $5. This single change brought a wave of innovation from FinTech companies who aimed to further democratize the stock market.

Robinhood created a mobile-based trading platform that focused on a friendly user interface and zero fee commissions. Acorns, betterment and Wealthfront all rounded off the money you spend in your checking account into a diversified stock portfolio. And even more recently, companies like Public, Commonstock and Stash are creating social investing platforms where investors can share with each other their investment strategies, essentially democratizing investment research. Now, even under-age investors are coming to the market in waves through custodial brokerage accounts.

All of this innovation had a profound impact on retail investing. In 2020 alone retail investing trading volume as a percent of the total market nearly doubled. In the past decade the two largest retail trading firms have increased client assets by 335%. Simply put, fractional shares has revolutionized trading for the common person. This not only has an impact on financial literacy but also on the wealth gap in America.

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