In an attempt to encourage more people to invest in stocks, several markets in Asia are pushing forward with fractional share trading, which, as the name implies, allows investors to own a stake in a stock, oftentimes less than a whole share, to cater to the investment needs of retail investors.
After South Korea and Singapore established fractional share trading guidelines in 2021 and 2023 respectively, Malaysia followed suit last September, allowing locally listed stocks to be traded in “less than one standard board lot”, which is below 100 shares.
"The introduction of fractional share trading would allow retail investors to diversify their portfolio, while creating a more inclusive capital market for all Malaysians," says Awang Adek Hussin, chairman of the Securities Commission of Malaysia.
The move came after participation rate for retail investors declined to an average of 25.7% in 2022 from 34.6% in the previous year, according to the Securities Commission.
Although the number of retail investors in Asian stock markets is growing, they still account for a small portion of the market. In India, where there is ample initial public offering and stock trading activity, retail ownership of the top 100 stocks in the local market stood at 7.62% as of last September, according to Prime Database. This is in contrast to the situation in the United States, where individual investors own 26% of shares outstanding in the US stock market, based on data from the Harvard Law School.
Still, retail investors are viewed as an indispensable part of the stock market, given that they maintain buy and sell activities through frequent trading activities, according to Melbourne-based investment marketing consultant InvestorHub.
Fractional share trading provides a motivation for stock market newbies to shift more cash from deposit accounts to the equity market. It also encourages retail investors, who are often deterred by uncertain returns from stock trading, to own more shares by lowering the risk of buying expensive shares.
The demographics of investing is changing as more millennials and Gen Zs flock into the stock market. “Younger investors are more tech-savvy and demand more personalized, digital solutions,” shares Dubai-based startup incubator Fast Capital.
On top of being tech-savvy, millennial and Gen-Z investors are more open to new investment instruments, which is one reason why fractional shares are expected to gain traction among the younger generation in Asia.
In South Korea, where fractional shares trading has been going on since 2021, 88.2% of investors in their 20s and 30s buy stocks, with 35% of them trading cryptocurrencies, according to a survey by Rich Planner Consulting.
In Singapore, half of the young adults are eager to grow their investment portfolios, a study by AIA Singapore reveals, reflecting the proactive sentiment among the youth to build wealth through various investment instruments. Given their small budget and low risk tolerance for investments, their investment needs could be better addressed with fractional shares. At the moment, fractional shares in Singapore are only applicable to US-listed stocks on certain brokerage platforms.
In addition to the stock market, the concept of fractionalization can be applied to other asset classes such as real estate, which can prove to be more attractive in view of the anticipated Fed rate cuts in the second half of 2024.
In India, before bringing fractional shares to the stock market, the Securities and Exchange Board of India (SEBI) approved several platforms for trading micro, small and medium real estate investment trusts (MSM Reits), basically fractional ownership of Reits, last November.
In addition, to downsizing the investment ticket size for Reit investment by 100 times to 10,000 rupees per token, the fractional ownership platforms also protect retail investors from fraud since all transactions are authenticated on a secure platform.
Financial markets, however, would do well to implement share fractionalization with proper investor education. A Deloitte report entitled "The Rise of Newly Empowered Retail Investors" published in 2021, warns that fractional share trading may embolden inexperienced retail investors into reckless trading activities.
“Many proponents of long-term investing have spoken out about fractional shares trading, arguing that it is not an effective way to build wealth over time,” says the report. “Their reasoning is that dollar-based investing may encourage more frequent trading and could foster speculative behaviour.”