pitfalls of fractional investing

Already very popular in the United States, fractional shares promise an investment accessible to everyone in the financial markets. But the practice is not without risk.

In theory, investing in shares should be the door to all wallets. And even if you have a limited budget, you can invest in shares of prestigious French companies such as Crdit Agricole (8.50 euros), orange (10.50 euros), or even Engie (11.15 euros). But this does not apply to all names.

Some actions are exchanged exorbitant prices for the most modest investors. For example, today we have to splurge 148 euros to buy a stake in Apple. Worst: The titles of luxury giant Herms are traded 1146 euros. That scares off small investors who want to position themselves on these values.

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Invest from 1 euro

At least for now. Because everything changes: the majority without 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 world’s most valuable companies thanks to partial shares, promises, for example, Lidia, who has completed more than 700,000 orders at the expense of its users since the launch of the trading function in the end of 2021.

The idea is tempting. And it is perhaps not surprising for the growing success of the stock market among young people, often less financially secure than in their years. Because almost today 5% with less than 25 hold shares, vs 2.4% in 2019. This is a a historically high indicatorinsists the Financial Markets Authority (AMF) in a June 2022 letter from the Savings Observatory.

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Managed products

However, split investment offers don’t always make it clear what you’re investing in, the AMF warns. Because the name of the shares actually covers several types of offers. And not all of them are equal.

With some brokers, you are actually buying shares of real stock. And they are grouped into whole stocks when you have enough of them. Then you benefit from equal rights than other investors. Namely, the possibility of receiving dividends and voting at the general meeting.

But more often than not, brokers actually offer you to invest in derivatives. On paper, these financial instruments replay the execution of the action to the smallest detail. However, you don’t actually own the share. And this can create several problems.

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Without rights

First, you do not have a voting right, a direct and automatic right to receive dividends, the AMF warns. But if you don’t get dividends, your only way to make money is to make capital gains when reselling your derivatives. This is a risky investment method that takes pride of place trade rather than investment long lastingand therefore not suitable for all investor profiles.

Fortunately, the practice is not systematic. Some of these tools may (…) entitle you to a periodic payment reflects dividends, AMF acknowledges. To understand the essence, it is important to carefully read the commercial and regulatory documentation, reminds the financial market policeman. In other words: make sure you understand what you are being offered to buy.

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Risky investment

Another downside: Fractional stocks expose you to a credit risk, because by subscribing to a derivative product, you become a creditor of its issuer. In case of bankruptcy, the latter may not be able to fulfill its obligations. Before you invest, learn about financial health the sender Make sure your investment is backed by the securities of the Fund for Deposit Guarantee and Liquidation (FGDR). This way, you will be compensated if your facility fails.

Finally, you cannot sell your fractional shares in the traditional stock markets. The sale of your assets will most often take place on a secondary market arranged through you on its own platform. Therefore, your ability to resell your fractional shares will depend on the liquidity of the products in this secondary market. It is important (…) to find out about the possibility of selling all or part of your investments and at what price, the AMF warns. This may not be easy.

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