Dear zwally33,When you buy fractional shares from Schwab, they charge a very low fee. If you don't know how it works, it goes like this: Chipotle Mexican Grill (CMG) is currently $3,210.49. I want to buy $100.00 worth - partial share, periodically. Example: every time I want to spend that $100.00, it will cost me $99.50; and the brokerage fee will be 50cent. So, that's is what I mean by buying a fractional share at a premium price; that 50 cent is the premium price. That's why I experimented with it and stop after realizing what was happening. It just wasn't for me. NOTE: The Stock Heatmap / diagram you provided is right on time. I understand what you were saying. Thanks.
You make a good observation, that when you buy fractional shares, the amount you purchase may have a value slightly less than what you pay. However, you are mistaken (at least technically) to say that Schwab charges a brokerage fee for buying a fractional share. Please let me explain what is happening.
When using a fixed dollar amount to buy shares, you will end up with some fraction of a share in the transaction unless the dollar amount is an exact integer multiple of the share price. Schwab appears to maintain fractional shares to only four decimal places and discards the less-significant decimal places. This has the effect of dividing each share into 10,000 pieces, which limits the precision for approximating fractional amounts. Schwab also appears to round the purchase down to the nearest 0.0001 share.
If we take your example, buying $100 of Chipotle Mexican Grill at $3,210.49 / share would give 0.0311(4789...) shares of CMG, but only the 0.0311 shares would be maintained by Schwab. So, while Schwab doesn't charge a brokerage fee, they do effectively pocket the 0.00004789+ shares of CMG for their part in buying and maintaining these fractional amounts for you.
Notice that this is similar to a retail store selling two items for $1.99. You could buy two, and spend $1.99, but if you only bought one, then you would likely pay $1.00, even though $1.99 / 2 is $0.995. Would you complain and say that the seller is charging you an extra fee? Should the retailer sell a single item to you for $0.99 and give you a bonus for buying fewer items, rather than the business pocketing the half-cent value?
Notice that because of Schwab's finite, 10,000-piece digital representation, higher-priced stocks will have "chunkier" dollar representations. For instance, a stock trading around $1 / share would allow for fractional share increments to within $0.0001, whereas CMG being one of the highest-priced stocks would only be represented within about $0.3210. So, when you see your 0.0311 shares of CMG display with a value of only $99.85, it is not because you were charged a fee, but because of the absolute price of CMG and how Schwab treats fractional shares.
Schwab could ameliorate the losses to clients in two ways. First, Schwab could maintain more decimal places to represent fractional amounts. For example, having five decimal places would effectively divide each share into 100,000 pieces, so fractions of CMG would then be accurate to within $0.0321. Second, Schwab could round to the nearest fractional increment, rather than always rounding down. This would sometimes cost Schwab a little, and sometimes cost the client a little, but tend to break even.
Before placing an order, you can easily determine your maximum loss due to Schwab's fractional-share methodology (divide the share price by 10,000). Your average such loss should be half of that maximum amount. If you are particularly interested in buying Chipotle Mexican Grill, then you can wait a few days for the 50-for-1 stock split distribution, when the value of partial-share purchases will be within two-thirds of one cent compared with an exact fractional representation.
Statistics: Posted by VViseguy — Sat Jun 22, 2024 1:09 am