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So, you want to invest in fractional stocks through Bitpanda Stocks* but aren’t quite sure what type of security a fractional stock is? You can find out about the differences between stocks, fractional stocks on Bitpanda, and contracts for difference (CFDs).
What is a stock?
Stocks are the security that most investors have at least heard of and associate with investing in the beginning. Put very simply, a security is any kind of tradable financial asset, such as stocks, bonds, ETFs and others, that you can buy or sell through financial markets.
So an investor buying a stock is, in the broadest sense, buying a share of a company’s equity (the value attributed to this company). The investor is investing in stocks in the hopes of making earnings through dividends - the reward investors get from the company for investing and/or profiting from changes in the market value of the stock.
Why do we need fractional stocks?
Usually, stocks of popular global companies are very expensive. Investors on a small budget may not be able to afford to even buy one single stock from companies such as Amazon. This is one of the reasons why stocks investing has traditionally been a privilege of the wealthy. Now, fractional stocks finally allow everyone investing with little money, as well as those selling their shares for a higher price to make profits.
What is a fractional stock?
Bitpanda has set out on a mission to democratise the world of finance and to make investing accessible to everyone, no matter their budget by offering fractional stocks and ETFs. Like the name implies, a fractional stock is a fraction (a smaller part) of a whole stock. Imagine a stock as a cake - cutting off individual slices creates smaller fractions of cake. Fractional stocks are a unique type of product but, just like regular stocks, they earn investors dividends proportionate to their stake.
Why is a fractional stock not the same as a stock?
A fractional stock is a unique type of financial product of its own kind (“sui generis”). Fractional stocks you invest in on Bitpanda are financial instruments replicating the value of the underlying stock or ETF. Fractional stocks cannot be traded directly on a stock exchange.
As an investor investing in fractional stocks and ETFs on Bitpanda, you enter into a derivative contract that regulates all rights and obligations between Bitpanda and you regarding your investment. Each derivative contract is always worth as much as the respective stock or ETF. Most people associate derivative contracts with CFDs, but fractional stocks are not CFDs.
What is a CFD?
A contract for difference (CFD) is also a derivative financial product. Bitpanda does not offer CFDs. Like in the case of a fractional stock, the performance or value of a CFD is dependent on the development of the underlying asset or assets. For instance, the performance of a CFD on any stock will always depend on price development of that stock.
How is a CFD different from a fractional stock?
There are several differences between fractional stocks and CFDs.
- Price developments
The owner of a fractional stock is generally looking for a price increase of the underlying of their fractional stock. Decreases in price are only desirable in certain situations, like where an investor wants to invest at a lower price.
A CFD trader, on the other hand, speculates on price increases (long positions) or price decreases (short positions) - in short, speculating on the price differences between the opening and closing prices of markets. Therefore, it is the price differences between entry and exit that are relevant for CFD traders - hence the name “contract for difference”.
Remember the concept of leverage in physics? A lever is used by exerting little force over a long distance to convert it into a large force. The concept of leverage is also used in making leveraged trades with CFDs.
An investor makes a small financial investment - called the “margin payment” - that is a portion of the full value of their trade and borrows the remaining amount from the broker to create “leverage” and push their smaller investment into a much larger market position. Why do traders use leverage? Easy: it allows for the trading of higher volumes with lower funds.
Why should I invest in fractional stocks?
CFD traders pay a smaller amount for their exposure to an open position in the hope of achieving a profit at significantly reduced costs if all goes well. If all does not go well, the trade will be incurred a loss and the trader’s costs become significantly higher. As you can see, CFDs are considered high-risk products for a reason. They are suitable for advanced investors who have sound knowledge of investing and the financial market.
Fractional stocks, on the other hand, offer a great way to enter and to learn about the markets to everyone investing for the first time. With the Bitpanda Stocks Beta*, you can now invest an amount of money you can afford and feel comfortable with. You can invest in fractional stocks on Bitpanda from as little as €1, commission-free and with tight spreads, allowing you to not only start investing but also to start a diversified portfolio with a wider range of assets.
*“Bitpanda Stocks” is a new product from Bitpanda and allows you to invest in fractional shares/ETFs. “Bitpanda Stocks” are not shares, but a contract that allows you to participate in the price movements of certain shares, including any dividend distributions. It is neither tradable on stock exchanges nor on other trading venues, but can be resold to Bitpanda at any time under the conditions set out in the general terms and conditions and the contract. Further details on this product, the issuer and the relevant risks are available in the prospectus at bitpanda.com.