At the simplest level, fractional investing allows investors to buy and own a fraction of a company’s share. When you buy shares on stock exchanges, you are buying a small part of a company whose shares are listed. With fractional investing, you get ownership of less than one share of that company. New technologies such as blockchain technology are widening the possibilities presented by fractional investing.
For example, the Singapore-based ADDX platform makes it possible for investors to buy a stake in a diverse range of assets for as little as $5,000 as the minimum one can have to join the platform. Previously, one needed at least a million dollars to participate in investing in that portfolio of assets. Smart contracts and blockchains have made this level of fractional investing possible.
To illustrate this further, think about how much one would need to create an investment portfolio of vintage wines. Each vintage wine is worth thousands of dollars or even tens of thousands of dollars, so it would be extremely expensive to create a diversified portfolio of vintage wines in order to avoid the risk that comes from focusing on just one wine maker. Needless to say, only the ultra-rich have been able to invest in vintage wines since they are the only ones who could afford the high upfront costs associated with putting together such a portfolio.
However, fractional investing that leverages blockchain technology can reduce the investment costs by a huge fraction because one would only need to acquire a tiny stake in each vintage wine in a portfolio.
Blockchain-enabled fractional investing also allows investors to structure and restructure their investment portfolios as needed. For example, if one wants 10% of their portfolio to be held in real estate, fractional investing allows the person to liquidate sections of their holdings so that what is left is exactly what is needed to keep the holding at 10% of the portfolio at a time when the shares are appreciating rapidly. The same approach can be used to increase holdings to a precise fraction of the entire portfolio.
The above flexibility also brings benefits in terms of risk management. Blockchain technology is now making it possible for retail investors to access various assets based on how much risk they are willing to take. For example, a first-time investor might be nervous about using $100,000 to buy a stake in one company. However, putting up $300 through fractional investing is easier for such a novice to stomach, especially if that money is going to a diversified pool of entities within the same industry.
Other entities, such as Coinbase Global Inc. (NASDAQ: COIN), demonstrate the different ways through which blockchain and other new technologies can have real-world relevance for ordinary people.
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