Kenyans can now buy fractional shares – and thus own securities that they would normally never be able to afford. But the new freedom also harbors new risks.
A lot has already been enthused about the “democratization of financial investments” and a fair financial market that is open to everyone. And for a few years now, a different wind has been blowing on the world’s stock exchanges, including the Nairobi Stock Exchange (NSE) It’s no longer just well-heeled large investors with huge bank accounts, but also normal people who want to supplement their pension.
Very few brokers still charge brokerage fees, transaction costs are kept to a minimum and thanks to the apps, such as Hisa app, one can start a new savings plan with a few finger swipes and touches on their phones.
For example, if you don’t have $1,906.72 US dollars in your account to buy a “full” share in the online travel agency Booking.com (as of November 20th, 2022), you can now pay half as much or just 10% of the price – and only get a fraction of the share. Expensive shares are one of the main reasons why people don’t invest. They think they have to invest large sums of money to be in it and to invest successfully.
The feature undoubtedly brings new opportunities. The question is whether investors should take them too. Because trading in fractional shares has its challenges and benefits.
Investors are already buying fractional shares
So far, fractional share trading are now available not only for ETFs, but also for individual stocks. Customers can specify a desired amount, which the broker will invest in the security. Those who buy shares “fractionally” continue to pay the same fees for an order for each transaction regardless of whether all the money is invested at once or just some of it. Dividends are also paid proportionately. Logically, the entitlement to dividends also decreases with the size of the investment.
Wealthier clients are not privileged
Trading in fractional shares is a real gain for the stock culture. All investors get the same access to securities in the market and the wealthier customers are not privileged. In principle, nothing speaks against it. The introduction means additional costs for the broker and also additional work. At the same time, a corresponding offer also opens up a broader target group, which in turn leads to more transactions. And that means higher income for a broker in the end.
However, some stock brokers are skeptical as to whether fractional share trading is really necessary. But fractional share trading can influence people to save and invest more.
Are fractional shares the future of investing in Kenya?
Because of its user-friendliness in the sense that one can invest with a fixed budget instead of a fixed number of shares, fractional share trading is the future of Kenya. Trading in fractional shares still seems to be a dream of the future. In any case, only the purchase of whole shares is still permitted on the stock exchange. Brokers therefore have to pay for the shares in order to be able to sell fragments to their customers. They act as a middleman, so to speak, and acquire entire shares on the stock exchange for their own account. They then split them up so that they can be booked into the depot for fractional buyers. Investors do not trade directly on the stock exchange, but rather with such brokers. Just like with normal share purchases, investors can return their fragments to the broker or liquidate them at any time.
Fractional shares are special assets
Doesn’t that automatically mean a higher risk for investors who are dependent on the broker as a result? What happens if it goes bankrupt? Customers do not have to fear a total loss due to insolvency. Because even if you don’t buy the fractional shares directly on the stock exchange, you are a co-owner. The shares are not only shown in the portfolio, for example via derivatives. The customer always receives real co-ownership of the shares in the collective stock via fractional shares. The fragments – just like whole shares – are part of the special fund, i.e. they are kept separate from the broker’s capital and are therefore their access is protected from third parties in case of insolvency.
No voting rights, no benefits
It is also not possible to attend the Annual General Meeting with only half a Volkswagen share. The right to vote when buying fractional shares lies with the broker. Because by law, only whole shares can be entered in the share register. Therefore, even after the sale, the broker or bank officially acts as the owner of the shares. Only when the sum of all fractions in a securities account equals a whole share is the investor noted in the share register – and thus entitled to vote.
In many cases, the waiver of voting rights also means that investors have to forego so-called non-cash dividends. If the dividend in kind is linked to attending the general meeting, it cannot be redeemed for fractions, but only for full shares. When non-cash dividends happen in the form of new shares, they are recoded to the fractional parts.
How to buy fractional shares in Kenya?
Late last year (2021), Hapa Kenya reported:
Hisa Technologies has unveiled the Hisa mobile app that allows anyone in Kenya to invest in US stocks and ETFs directly from their phones using mobile money. Kenyans now have the chance to own fractional shares of companies like Apple, Tesla, Google and many more.
Fractional ownership is the percentage ownership in an asset. Fractional ownership shares in the asset are sold to individual shareholders who share the benefits of the asset such as usage rights, income sharing, priority access, and reduced rates.
“In an increasingly connected global village driven by smartphone penetration and mobile money, our vision is to allow anyone across the continent to access different global investment options. We are pleased to have received a nod from CMA as we continue to make steady progress in our partnership with Hisa Technologies. Receiving this approval reflects our robust policies, compliance framework and risk management systems that are in place,”
Faida Investment Bank’s Operations Director, Rina Hicks.
If you want to invest in fractional shares in Kenya, you can download one of the apps and invest wisely.
