How do brokers make money from fractional shares trades?

Question

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.

Broker buys 25 shares
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.

Broker earns: 0.5 * 2 = 1
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.)

mhoran_psprep · Answer

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.

How do brokers make money from fractional shares trades?

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