How do brokers make money from fractional shares trades?
How do brokers make money from fractional shares trades?
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own2pwn · External communityPost link
External question — Personal Finance Stack Exchange
Author: own2pwn
Original post: https://money.stackexchange.com/questions/124687
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
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Let's imagine the following scenario
Day one: the price of the stock
XYZ
was
47.50
during the whole trading day.
After clearing, the total number of shares users have is
24.5
.
Broker buys 25 shares
Broker buys 24 shares and keeps in mind about
0.5
it owes
Day two: price goes up to
49.50
, all users sell their shares.
Broker earns:
0.5 * 2
=
1
Brokers loses:
2*(24-24.5)
=
-1
If the worst case scenario will occur in more than a half of cases, would it lead broker to bankruptcy or is there a way to make profit from it? (we don't count here any profits from fees, subscription price, etc.)
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mhoran_psprep · External communityPost link
External answer — Personal Finance Stack Exchange
Author: mhoran_psprep
Original post: https://money.stackexchange.com/a/124714
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
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I would look at it this way.
On day 1 there are multiple trades in and out, and the broker ends up at the end of the day owning some where between 0.01 and 0.99 of each company they allow fractional shares.
One day 2 there are multiple trades in and out, and the broker ends up at the end of the day owning some where between 0.01 and 0.99 of each company they allow fractional shares.
Sometimes the broker makes money off those fractional shares other times they lose money. But if the price of each share is low ( so not Berkshire Hathaway at ~$280,600) and has a decent amount of transactions they can manage the risk.
The broker will never own more than a share of each company in reserve. The risk they take is the price it costs them to provide this service, and attract certain investors.
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Quoted from Forex.com.bd-Editorial External answer — Personal Finance Stack Exchange Author: mhoran_psprep Source score (net votes, not local likes): 3 Original post: https://money.stackexchange.com/a/124714 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I would look at it this way. On day 1 there are multiple trades in and out, and the broker ends up at the end of the day owning some where between 0.01 and 0.99 of each company they allow fractional shares. One day 2 there are multiple trades in and out, and the broker ends up at the end of the day owning some where between 0.01 and 0.99 of each company they allow fractional shares. Sometimes the broker makes money off those fractional shares other times they lose money. But if the price of each share is low ( so not Berkshire Hathaway at ~$280,600) and has a decent amount of transactions they can manage the risk. The broker will never own more than a share of each company in reserve. The risk they take is the price it costs them to provide this service, and attract certain investors.
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