by Karl Denninger
Market-Ticker.org
Robinhood’s “claim to fame” is to “democratize” stock trading by making it possible to buy stocks and obtain reasonable diversification without having enough money to buy whole shares of the most-expensive of the stocks you wish to purchase, plus enough to buy whole shares of the rest to obtain reasonable diversification.
Concentration is dangerous; buy just one stock and you bet your entire portfolio on the outcome of one company. That’s dumb. This is why, by the way, index funds are so popular — never mind since they’re entirely mechanical a couple of guys and a computer can run them, so their overhead is very low (meaning your cost when you get down to it) as well. Some fund companies (Vanguard, to name one specifically) additionally deliberately allocate buys and sells so as to disfavor those who are actively trading their funds come tax time, which is entirely legal if disclosed (and it is in their case) and further reduces cost by driving those folks somewhere else simply because they get hammered come tax time. Less work, less cost. Simple.
Let’s examine the problem that arises with fractional trading with a nice graphic: