Already very popular in the United States, fractional shares carry the promise of an investment accessible to all on the financial markets. But the practice is not without risk.
In theory, investing in stocks is meant to be the door to all purses. And even if you have a tight budget, you can invest in the shares of prestigious French companies, such as Crdit Agricole (8.50 euros), Orange (10.50 euros), or even Engie (11.15 euros). But this is not true for all titles.
Some actions are exchanged prohibitive prices for the most modest investors. For example, today we have to spend 148 euros to acquire a share of the Apple company. Worst: The titles of the luxury giant Herms are trading around 1146 euros. What discourage small investors wishing to position themselves on these values.
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Invest from 1 euro
At least, so far. Because things change: most no-brokers like BUX, Lydia and Trade Republic now offer their users to buy fractional shares from a few euros. One euro is all you need to bet on LVMH or Apple and become an investor in the most valuable companies in the world, thanks to fractional shares, promises for example Lydia, which has executed more than 700,000 orders for the account of its users since the launch of its trading functionality at the end of 2021.
The idea has something to seduce. And it is probably no stranger to the growing success of the stock market among young people, often less financially well-off than their years. Because today, nearly 5% of the under 25 hold shares, against 2.4% in 2019. This is a historically high rateinsists the Financial Markets Authority (AMF) in the Letter from the Savings Observatory of June 2022.
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Driven products
However, split investment offers do not always explain very clearly what you are investing in, warns the AMF. Because the name of fractions of shares actually covers several types of offers. And not all of them are equal.
With some brokers, you are actually buying fractions of real shares. And these are grouped into whole stocks when you hold enough of them. You then benefit from same rights than other investors. Namely the possibility of receiving dividends and voting at general meetings.
But more often than not, what brokers actually offer you is to invest in derivatives. On paper, these financial instruments replicate the performance of an action down to the smallest detail. However, you do not actually own a share. And this can pose several problems.
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No rights
First, you have no voting rights, no direct and automatic right to receive dividends, warns the AMF. But if you don’t receive a dividend, your only way to make money is to make a capital gain when reselling your derived products. It is a risky investment method, giving pride of place to trading rather than investment long termand which therefore does not suit all investor profiles.
Fortunately, the practice is not systematic. Some of these instruments may (…) entitle you to a periodic payment reflecting the dividend, acknowledges the AMF. To be sure, it is important to read the commercial and regulatory documentation carefully, reminds the financial markets policeman. In other words: make sure you understand what you are being offered to buy.
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Risky investment
Another downside: fractional shares expose you to a credit risk, since by subscribing to a derivative product, you become a creditor of its issuer. In the event of bankruptcy, the latter may not be able to honor its commitments. Before investing, find out about the financial health of the sender. And check that your investments are covered by the securities guarantee of the Deposit and Resolution Guarantee Fund (FGDR). Thus, you will be compensated in the event of failure of your establishment.
Finally, you cannot sell your fractional shares on the traditional stock markets. The sale of your assets will most often take place on a secondary market organized through you on its own platform. Therefore, your ability to resell your fractional shares will depend on the liquidity of the products on this secondary market. It is (…) important to find out about the possibilities of selling all or part of your investment and what value, warns the AMF. It may not turn out to be simple.
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