- Charles Schwab is launching fractional stock-trading in early June, the firm plans to announce on Tuesday.
- The offering, which founder Charles R. Schwab had first said the firm was working on last fall, excludes exchange-traded funds and is limited to S&P 500 components.
- For Schwab, the product marks a push to attract new investors who don't have $2,300 to shell out for an Amazon share.
- Robinhood and Fidelity have launched their own fractional-stock features in recent months.
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Charles Schwab is launching fractional stock-trading in early June, the firm plans to announce on Tuesday, marking an effort to attract newbie investors in what's become a fiercely competitive arena for both new and legacy brokerage players.
The offering, which the firm first said it was working on last fall, will exclude exchange-traded funds and is limited to S&P 500 components, Business Insider has learned.
The move will allow investors to buy slices of individual stocks with a minimum of $5. The service, named "Schwab Stock Slices," will launch on June 9 and allow users to purchase up to 10 different "slices" at once.
"We developed Schwab Stock Slices to meet two important needs we heard from clients — newer investors who want the ability to buy multiple stocks in small dollar amounts and older more affluent investors who want to more easily gift stock ownership to younger generations," Neesha Hathi, the firm's chief digital officer, said in a statement.
For Schwab, the launch has been a long time coming. Founder and chairman Charles R. Schwab said in an interview with The Wall Street Journal last October that the company was planning to introduce the capability soon. At the time, a spokesperson declined to specify a timeline for the launch.
Competitors to the San Francisco-based wealth management and brokerage firm have launched their own fractional-share offerings in the meantime. Stock-trading startup Robinhood and brokerages Fidelity and Interactive Brokers have gone live with their own fractional-stock features in recent months — Interactive Brokers in November, Robinhood in December, and Fidelity in January.
That's in addition to a slew of startups in the space that already had fractional trading in place, including Stash, M1 Finance, SoFi, and MoneyLion.
For Schwab, a firm with $3.5 trillion in client assets, pushing to acquire customers who can't afford to buy a full share of Amazon or Google might seem out place. But it underlines a strategy shift among wealth managers and brokerages to pursue less affluent customers.
The competition for going after young investors, especially high earners who could one day turn into lucrative wealth management clients, reached a fever pitch late last year when a string of brokerages said they would eliminate commissions for trades.
Interactive Brokers was the first of the legacy brands to make a move, and rivals, including Schwab, followed suit.
And Wells Fargo is now thinking about its own fractional-share trading offering, Business Insider first reported last month.
"We don't want people who are not really capable of making stock decisions, making decisions as if it were gambling," Joe Nadreau, Wells Fargo's head of independent brokerage and platform services, told Business Insider, adding that "we want it to be more of, 'Hey, let us help you create a basket of securities that are fairly well-diversified.'"
A complex build-out
But offering fractional-share trading isn't as simple as flicking a switch. The process of slicing up stocks is a complicated one that could pose some risk if not handled properly; it requires managing an internal inventory of stocks that are cut up and distributed to customers throughout the day.
Because of the complexity, firms like Apex Clearing and DriveWealth, who have relationships with many fintechs, are managing the fractionalization of shares for many startups. Most of the traditional providers, in addition to Robinhood, have done fractional-share trading on their own.
A spokesperson for Schwab said the firm will handle the process internally.
The recent market downturn and surge in volatility spurred by the coronavirus pandemic has led to an uptick in daily trades at the firm, but earnings took a hit from near-zero interest rates.
During the first quarter, Schwab saw a "doubling of daily trades relative to the prior four quarters," chief executive Walt Bettinger said on a call with analysts last month to discuss earnings, according to a transcript on the financial research platform Sentieo. Net income fell 18% to $795 million compared to a year prior.
Schwab is set to close on three separate acquisitions this year: tinier rival TD Ameritrade, which it said last November it would acquire in a $26 billion deal; Wasmer, Schroeder & Co, a Florida-based fixed-income management firm; and assets of USAA's investment management business.
