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Jared Dillian

Fractional Shares Expose Wall Street Greed

Anyone who has only $5 to invest should not be buying stock.

The bull market in stocks has fostered some bad ideas. 

The bull market in stocks has fostered some bad ideas. 

Photographer: Timothy A. Clary/AFP via Getty Images

It used to be that novices went about investing the right way. They bought low-cost mutual or exchange-traded funds using the dollar-cost averaging strategy and held them for years. But a gigantic stock market rally since late March seems to have inspired millions of new investors. And instead of being confined to relatively safe, stodgy funds, they now have the ability to buy so-called fractional shares, or less than one share of stock. This is giving more people access to the stock market than ever before. I would not characterize this as progress.

Back in the days of pin-striped suits, suspenders and bull and bear cufflinks, one used to have to buy a “round lot” of 100 shares to invest in the stock market. The cost to do so could easily run into the the thousands of dollars. Sure, “odd lots” of less than 100 shares were permitted, but they were frowned upon because such trades were more expensive for brokers to execute and not worth the effort. This did a pretty good job of keeping uninformed investors out of the market and from hurting themselves financially.