Retail investors have an opportunity to invest in these global brands through Contract for Difference (CFD) fractional shares, which allow an investor to purchase a small fraction of these shares.
This essentially means that an investor does not need a huge investment to add the top global companies to his or her investment portfolio.
Fractional shares are smaller portions of a share, which enables new investors to own a small portion of a share.
It is the dream of retail investors to invest in companies that give them the opportunity to diversify their portfolios, including foreign stocks, to mitigate the risk due to price volatility.
This is especially true at the moment due to the negative impact of the Covid-19 pandemic being felt in all sectors and economies globally.
However, most retail investors who may have an opportunity to invest in international stocks may find it expensive to buy individual shares of companies quoted on global stock markets like Tesla, Apple, Amazon, Toyota, Honda and Alibaba. At the time of writing this article, Amazon was trading at more than Sh360,800 ($3,319), whereas Tesla was trading at Sh48,270 ($444).
But all is not lost. Retail investors have an opportunity to invest in these global brands through Contract for Difference (CFD) fractional shares, which allow an investor to purchase a small fraction of these shares.This essentially means that an investor does not need a huge investment to add the top global companies to his or her investment portfolio.
Fractional shares are smaller portions of a share, which enables new investors to own a small portion of a share. For instance, instead of purchasing one full share of Apple, you can buy 0.1 or 1/10th part of the share, offering the flexibility to invest as much as you want in a company instead of purchasing a full share.
Investing through CFD fractional shares has the potential to democratise stock markets by facilitating access to stock markets for retail investors. People who never had access to highly priced shares can start investing in top global companies.
The first step is to choose a brokerage firm that offers CFD fractional shares to their existing retail customers. It is also advisable to choose a brokerage firm that charges nominal transaction fees and lower commissions, along with timely settlements. After that, the next step is to develop a stock watchlist with shares of companies that investors are interested in. Investors are also advised to diversify stocks across industries, sectors and locations to mitigate risks.
Ideally, investors are able to input the amount they wish to invest in a particular share, which allows the broker to calculate the equivalent CFD fractional share and process the trade. When the market meets the objectives of the investment strategy, the risk is calculated and trades are executed.
Investing through CFD fractional shares has many advantages. One of the primary benefits is that it offers investors access to leading global companies for a small premium instead of purchasing a full share.
Investors also have a choice of investing in amounts that they are comfortable with. New investors are advised to add multiple investments to their portfolio. CFD fractional shares allow investors to put only the amount they are comfortable with or want to invest.
Another advantage is that investors are exposed to greater portfolio diversity. Diversification helps retail investors minimise their portfolio risk by distributing investments across different sectors, markets and asset classes. CFD fractional shares enables investors to diversify their portfolio with global investments and create a portfolio comprising some of the top stocks from leading economies of the world.
By offering CFD fractional shares to investors, brokerages can scale up their customer base quickly. Brokerages can target underserved customer segments to develop new revenue streams.
Investing in fractional shares also has disadvantages, beginning with higher trading or transaction charges, which makes it suitable for long term investments only. Since fractional trading allows investors to accumulate fractional shares of companies, they are highly likely to trade frequently. This, in return, could inflate their overall transaction fees or commission charges. If an investor plans to create a portfolio for long-term growth, fractional shares are a suitable investment.
Also, not all the brokerages provide fractional share investing, so investors may have to open a new account and pay setup fees.
There is also possible loss of fractional dividends. If an investor owns CFD fractional shares, they may end up losing a part of their dividend(s). Imagine if you own a 0.1 share of a company that announces a dividend of Sh5 per share. Since you own 10 per cent of a share, your dividend comes out to be Sh0.50. Several exchanges follow a practice of leaving out fractional dividends (less than Sh1), leaving investors without dividend income.
Whereas the ability to invest in some of the best global companies sounds exciting, it is important for an investor to do proper analysis before investing. An investor must make sure that they understand the fundamentals of the company, its recent growth, and financial projections. If you’re investing for dividend income, CFD fractional shares may not be a suitable match for your portfolio.
Kamau is a research and markets analyst at Scope Markets Kenya
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