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Fractional share investing is gaining traction

By Opinion Time of article published Apr 28, 2021

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By Anna Rich

Six-and-a-half years ago, when the Purple Group’s Easyequities online share investment platform launched, there were 280 000 retail investor accounts on the JSE.

“This figure provides some context to our growth in retail investors over this period,” says Purple Group chief executive Charles Savage. “Across the platform, we have 380 000 unique investors who manage 500 000 accounts.”

In general, barriers to investing in equities include the price of shares and the minimum investment amounts required by institutions.

In addition to the option of investing in complete shares, Easyequities offers its own form of fractional share investing. Fractional investing means that those who cannot afford to buy a whole share are now able to invest. This technique is democratising investment, and enables greater diversification.

Easyequities offers fractional share rights through a contract for difference (CFD). You do not own the portion of the share but experience the benefits – and risks – of increases or decreases in the share price.

If you keep buying additional fractional share rights for a particular share, once you reach 100%, the whole share is transferred to you.

“Our entry point is literally zero, because you can open an account and start investing on a demo account with no money, to play around and get a feel for real markets,” says Savage. “Then when you start investing, you can invest as little as a rand, though at this point it is less cost-effective for you.”

Before the outbreak of the Covid-19 pandemic, Easyequities saw growth in customer numbers of almost 100% year on year.

“The dynamic fuelling our growth has been our own customers: 65% of all customers are referred by existing customers. That’s a snowball rolling downhill,” says Savage.

Over the past 12 months, growth accelerated by at least a couple of years, he says. In February last year, they had 12 000 new customers, and in March last year, 60 000. The rate has continued at about 2 000 new customers a day.

Savage attributes the acceleration to the pandemic; coupled with intense media coverage on its effects on financial markets, Covid-19 gave people more time to consider investing. “Investing is one of those things that people put off. Well, Covid-19 gave us more time.”

In October last year, in a move that holds the promise of further growth in fractional investing, Capitec partnered with Easyequities to give their clients the option of buying and selling shares directly from their new app.

“From a company perspective, we get to run along the Capitec rails and access their customers, which is an extraordinary opportunity,” says Savage.

As at September last year, Capitec had 7.3 million digital banking clients, and on the Google Play Store, downloads of the new app now exceed 5 million. To date, less than 20% of the 161% Easyequities growth in customer numbers is attributable to the access to Capitec customers, but Savage adds that “they’re just getting started”.

“The current number of clients registered for the Easyequities widget on our app is almost 100 000,” says Capitec.

Customers who invest in Easyequities via the new Capitec banking app benefit from 20% lower costs. For this market, data is an expensive part of the investing experience, says Savage, but the Capitec banking app is zero-rated for data.

Also in October, First National Bank (FNB) announced its answer to fractional share investing, based on exchange traded notes (ETNS). The investor effectively lends money to the issuer of the ETN, the bank, then their return is based on the shares it tracks.

“Customers are now able to obtain offshore exposure through the JSE without purchasing the full share,” says Nicholas Riemer, investment education head, FNB Wealth and Investments. The entry point is R10.

Soon after the initial offering of access to Microsoft, Tesla, Coca-cola, Mcdonald’s, and FAANG companies (Facebook, Amazon, Apple, Netflix and Alphabet), FNB expanded the list to include companies such as Berkshire Hathaway, Goldman Sachs, Paypal and Visa, and the MSCI World ETF.

The number of investors is yet to be confirmed, but they have favoured Tesla, Amazon and Microsoft, in that order. FNB has not focused on local shares, says Riemer, as “there are already competitive products and platforms that provide fractional exposure to local shares”.

The ETN offering promotes financial inclusivity, because clients are able to obtain global exposure in a cost-effective manner, Riemer says.

He describes the ETN offering as “self-directed, in that clients choose to invest at their own discretion”.

However, Riemer adds that FNB has created a client journey focused on education, FAQS and research to help clients make informed decisions within their means.

For Easyequities customers who read the terms and conditions, investing in securities and CFD transactions is spelled out as “high risk”.

However, Savage says the biggest risk is not investing. The Easyequities approach is to get investors into their ecosystem by reducing friction points related to affordability. Once within the ecosystem, they address friction points related to understanding through the Easy Academy. Over time, as investors grow in confidence and knowledge, they can increase their investment, he says.

“If you eliminate people because they don’t understand the risks, or they lack financial education, or don’t know what to invest in, then you go back to where you started: 95% of South Africans are not accessing the best asset class for creating wealth.”

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