Stock Splits vs Fractional Share Buying
Both frequent stock splits and widespread adoption of fractional share buying aim to make high-value shares more accessible and increase market liquidity, but their impacts differ in scale, efficiency, and long-term benefit to the economy.
Here is why.
Stock Splits: Impact and Limitations
Advantages:
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Increased Liquidity: Stock splits increase the number of shares outstanding and lower the price per share, making the stock more affordable and improving liquidity.
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Attracting Retail Investors: Lower prices can attract new investors, especially those previously priced out, and may boost trading activity in the short term.
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Market Perception: A split can signal management’s confidence in the company’s growth prospects and may result in a temporary increase in share price and trading volume.
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Employee Participation: Lower share prices post-split make it easier for employees to participate in stock ownership programs.
Drawbacks:
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Short-lived Effects: The positive effects on price and volume often diminish over time unless supported by strong business fundamentals.
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Increased Volatility: Lower share prices may attract speculative trading, potentially increasing volatility1.
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Administrative Costs: Stock splits involve legal and administrative expenses, which can be substantial for smaller firms.
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Redundancy in Modern Markets: With the rise of fractional share investing, the practical need for stock splits to improve affordability has lessened.
Fractional Share Buying: Impact and Advantages
Advantages:
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Lower Entry Barrier: Investors can buy portions of expensive stocks with any amount of money, making the market accessible to more people.
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Greater Diversification: Enables small investors to diversify across multiple stocks, reducing risk and improving portfolio resilience.
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Enhanced Liquidity: Broader participation increases overall market liquidity, as more investors can trade high-value shares.
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Flexibility and Dollar-Cost Averaging: Investors can invest precise amounts and automate regular investments, smoothing returns over time.
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No Need for Corporate Action: Fractional share buying does not require companies to take any administrative steps or incur costs; it is implemented at the broker/platform level.
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Democratisation of Investing: Opens up equity markets to a wider demographic, potentially increasing overall savings and investment rates in the economy.
Drawbacks:
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Platform Dependency: Not all brokers offer fractional shares, and liquidity for fractional shares may depend on the broker’s internal systems7.
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Voting Rights Complexity: Fractional shareholders may have limited or proportionate voting rights, which can complicate corporate governance.
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Potential Fees: Some platforms may charge hidden or higher transaction costs for fractional trades, though this is becoming less common.
Comparative Overview
| Feature | Frequent Stock Splits | Fractional Share Buying |
|---|---|---|
| Increases liquidity | Yes (temporarily) | Yes (sustained, scalable) |
| Lowers the entry barrier | Yes (to a point) | Yes (to any amount) |
| Administrative cost | High (for companies) | Low (for brokers/platforms) |
| Accessibility | Improved, but limited to split ratio | Maximise any amount possible |
| Impact duration | Short to medium term | Ongoing, structural |
| Market democratization | Moderate | High |
| Affects company fundamentals | No | No |
| Complexity for investors | Low | Low to moderate (platform-dependent) |
Conclusion
Encouraging broker firms to adopt fractional share buying is more beneficial to the overall economy than relying on frequent stock splits.
Fractional shares directly address affordability, democratize market access, and promote sustained liquidity and diversification for all investors, without imposing costs or administrative burdens on listed companies.
Stock splits, while helpful in certain scenarios, are increasingly redundant in a market where fractional investing is available and do not provide the same long-term, scalable benefits.
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