A new way of stock-market wagering is taking hold among younger investors who prefer to think about how much they can spend instead of how many shares they can afford.
4 min
Purchasing a piece of Apple or Tesla once meant calculating how many shares you could afford to buy. That no longer matters. Now you can pay whatever you’re willing to spend, even if that amounts to pocket change.
Thinking primarily about dollars instead of shares represents a dramatic shift in the world of personal finance, posing new opportunities and risks for investors. The practice is gaining momentum thanks to the widespread adoption of fractional trading—which allows investors to purchase slivers of traditional shares—as well as an industry push to reduce online trading fees to zero.
These twin developments made it easier and more cost-effective for new investors to wager as little as $1 on stocks. The volatility of the coronavirus pandemic then turbocharged these bets as market leaders like Apple Inc. and Tesla Inc. soared into the hundreds or thousands of dollars. The S&P 500, meanwhile, is up 73% since its intraday low point in March 2020.
The lineup of wealth managers catering to dollar-focused investors is spreading from upstart online brokerages that rely on flashy apps to industry stalwarts that have longstanding bricks-and-mortar offices around the U.S. One of those giants, Fidelity Investments, launched a service early in 2020 called Stocks by the Slice allowing investors to purchase fractional shares for the first time. When Stocks by the Slice launched last February, 75% of the buy trades from investors using the service were in dollars on average. This month Fidelity now says that figure is closer to 85%.
In the future “retail investors will be thinking 100% in dollars, not in shares,” said Scott Ignall, head of Fidelity’s retail brokerage business. “Clients no longer need to use a calculator to figure out how many shares of stock they want to buy.”
Advocates say the dollar-first approach is helping democratise access to the stock market and open the wealth management industry to a new wave of investors. There are also dangers. Some say the strategy could encourage risky speculation that some analysts and academics warn will end with individuals losing money. Thinking in dollars, some worry, will distance new investors from their investments or inhibit their greater understanding of market moves.
“If you give people a smaller sandbox to make mistakes, they’ll still make mistakes,” says Larry Harris, former chief economist for the Securities and Exchange Commission and professor of finance at the University of Southern California’s Marshall School of Business. “But also when you make mistakes, you can learn at a lesser cost.”
The ability to pay micro amounts and hold fractional shares when purchasing stocks isn’t necessarily new. Investors have long paid little for penny stocks and small-cap stocks, while others have been able to amass portions of shares through dividend-reinvestment plans. What is new is the ability to freely trade partial shares during market hours. Brokers like Fidelity and Robinhood Markets Inc. can now execute fractional orders immediately, much as they execute ordinary orders to trade stocks or exchange-traded funds.
“Surely, people had to think in dollars before,” Mr Harris said. “Now, they just don’t feel the constraints.”
That is the case for James Evans, a 29-year-old bar and night club manager in Manchester, England. When the pandemic hit Manchester, he was furloughed with more time on his hands to think about his personal investing strategy.
Mr Evans uses Trading212, a London-based trading app, to “build his own ETF,” as he puts it, with fractional buys. He said thinking in dollars gives him more freedom to diversify his portfolio and establish a stronger position.
“This has given me a lot more time to look at what I’m doing, as opposed to just kind of winging it,” he said. “The pandemic has kind of helped that, just in a weird way.”
Robinhood, which was founded in 2013, is one of the biggest beneficiaries of this shift. Its free app now has 13 million users with a median age of 31. Investors can start investing for as little as $1, but the most commonly-traded amount on Robinhood’s recurring investment feature—which makes investments in dollars—is $10 every week.
Account holders “want to not do the math,” said Madhu Muthukumar, head of product at Robinhood.
Robinhood’s recurring investments option allows users to put a set amount of money toward given investments on a weekly or monthly basis. The company says the feature was in response to users who aren’t day traders but wanted an investment option they could build into their otherwise low-tech financial lives.
Larger rivals are now embracing the same approach. Last June Charles Schwab Corp. launched a fractional-trading program called “Stock Slices” that had nearly 190,000 accounts as of December. Schwab estimates the average Stock Slices user is younger than its average brokerage customer. Their average buy order is $275, according to Schwab, still well below the going stock price of companies like Tesla and Netflix Inc.
“We’re seeing growth across all kinds of clients, but we have seen a lot of growth in our younger user base,” said Fidelity’s Mr. Ignall. “We do think that this new way of investing has definitely contributed to that growth.”
For Mr Evans, the 29-year-old nightclub manager, thinking in dollars as opposed to shares demystifies the process. He employs dollar-cost averaging, a strategy that invests the same amounts of money at regular frequencies over time, to build his portfolio. This strategy makes it easier for novice investors to set up their investments with the amount of money they want to spend—and it is also often the only option available to younger, newer players who don’t have lots of money to invest in the market.
“Especially when you’re dollar cost averaging, it’s a lot harder with whole shares, because if the whole share is quite a lot, you have to make your dollar-cost averaging more spread out,” Mr. Evans said. “If you can’t do fractionals, you have to just buy one share, which could be, you know, $100. Then you have to make sure you time it so that it fits your investing time frame.”
But as Mr Harris points out, all investors should be thinking about dollars in some capacity. Stock prices can go up and down depending on the total value of a company’s equity or the amount of shares left to buy.
Ultimately, Mr Harris said, the best way to purchase stocks is a personal decision for many investors: “Do you feel richer owning the number of shares you own or the dollars you own?”
Copyright 2020, Dow Jones & Company, Inc. All Rights Reserved Worldwide. LEARN MORE
BNW Developments has established a Sydney presence, joining Arada and Sobha Realty among the growing number of UAE developers pursuing Australian buyers and development opportunities.
The Australian leather house has opened an immersive four-day pop-up in Manhattan, unveiling its Bloom Collection and redefining what a product launch can look like.
Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.
4 min
Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.
This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.
Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.
Here are three strategies useful for functional families.
It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.
But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.
If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.
To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.
In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.
If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.
Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.
The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.
Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.
However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.
These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.
But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.
Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.
The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.
Sellner doesn’t worry about his children using the funds for another purpose.
“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.
Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.
Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.
Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”
A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.
Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.
Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.
Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.
