# How do brokers make money from fractional shares trades?

Let's imagine the following scenario

Day one: the price of the stock `XYZ` was `47.50` during the whole trading day. After clearing, the total number of shares users have is `24.5`.

2. Broker buys 24 shares and keeps in mind about `0.5` it owes

Day two: price goes up to `49.50`, all users sell their shares.

1. Broker earns: `0.5 * 2` = `1`
2. Brokers loses: `2*(24-24.5)` = `-1`

If the worst case scenario will occur in more than a half of cases, would it lead broker to bankruptcy or is there a way to make profit from it? (we don't count here any profits from fees, subscription price, etc.)

• What is 'after cleaning' ? No broker is going bankrupt from losing money on 1/2 a share, no matter how many occurrences there are. Apr 28 '20 at 23:55
• @BobBaerker I meant to say `clearing`. What if we just make trades intraday? Day range is 2 to 5 and users makes 3 every trade on 1/2 of a share? If broker won't copy trades and buy a stock, shouldn't it end up with the total loss of 3 * num_of_successful_trades? Don't get me wrong I'm just trying to get what I'm missing. Apr 29 '20 at 7:55
• Such small numbers are inconsequential considering the amount of money that brokers have under management versus the number of people and size of investment of those trading fractional shares. Fidelity? Over 8 trillion dollars. And your analysis assumes that brokerage firms are passive in their approach to this. If there was some degree of risk here, don't you think that their trading desks would employ some manner of risk management? I think that you're trying to make a mountain out of a mole hill. This is a nothing burger. Apr 29 '20 at 11:47

I would look at it this way.

On day 1 there are multiple trades in and out, and the broker ends up at the end of the day owning some where between 0.01 and 0.99 of each company they allow fractional shares.

One day 2 there are multiple trades in and out, and the broker ends up at the end of the day owning some where between 0.01 and 0.99 of each company they allow fractional shares.

Sometimes the broker makes money off those fractional shares other times they lose money. But if the price of each share is low ( so not Berkshire Hathaway at ~\$280,600) and has a decent amount of transactions they can manage the risk.

The broker will never own more than a share of each company in reserve. The risk they take is the price it costs them to provide this service, and attract certain investors.

• Thanks for the suggestion, I'm going to try to buy a dollar of berkshire ! May 5 '20 at 15:12
• Funny thing is that today, BH is trading at \$316,251 per share. Hope you bought dozen of shares that day, not just 3.5e-6 of one :) Aug 15 '20 at 6:14
• A large portion broker earnings comes from interest earned from cash sitting in investor accounts. Other sources may be managed money fees, margin borrowing, short sale borrow fees, and ancillary products such as annuities, etc. The risk on fractional shares is peanuts compared to earnings from these other sources of revenue. And while it's true that The broker will never own more than a share of each company in reserve, there's no reason why the broker can't be short some amount of these fractional positions, thereby offsetting some/much of this long fractional share risk. Aug 22 '20 at 14:55