Introduction to Fractional Investing
Fractional investing is gaining traction among investors as a novel approach to asset acquisition. In fractional investing, multiple investors come together to divide a single asset like a property or artwork into smaller 'fractions,' akin to slicing up a pizza for everyone to share.
Why Go Fractional?
The main attraction for fractional investment is the ability to invest a relatively smaller sum into a highly valuable asset. For example, let’s consider a property worth $1 million. This property can be broken down into 1,000 'fractions,' each costing $1,000. If 1,000 investors contribute, the property can be purchased collectively. This allows a higher number of investors to participate by investing smaller amounts to own a stake.
How Do You Profit from Fractional Investing?
Fractional investing does not physically divide the asset but allocates the right to share in its profits. These rights are considered 'securities,' similar to stocks and bonds. You can either profit from selling the asset when its price goes up or share in its consistent income streams, like rental income from real estate, or royalties from music rights. However, it is important to note that losses are also a possibility, depending on market conditions.
Where Can You Invest Fractionally?
The scope of fractional investments is quite broad and includes real estate, artworks, high-value livestock like Korean beef, racehorses, and even intellectual property rights like music royalties. These investments generally share two characteristics:
- Asset prices fluctuate like stocks or bonds.
- Asset management involves some costs, such as property maintenance, artwork preservation, or livestock care.
What Are Token Securities?
Token securities are digital records that allow all investors to transparently view transaction information. Utilizing blockchain technology, token securities maintain real-time records of price fluctuations and transaction histories. In some cases, third parties like the Korea Securities Depository may also maintain these records. Token securities serve as proof of ownership for fractional investors.
Who Issues Token Securities?
Fractional investing platforms issue token securities. There are different platforms for various types of assets like real estate, artwork, and livestock. The platforms issue tokens corresponding to the number of 'fractions' an asset has been divided into, and investors with more tokens receive a larger share of the profits, similar to owning more shares of a stock.
Trading Platform Limitations
Currently, most platforms handle both the issuance and trading of tokens in-house, making it challenging to trade tokens from one platform on another. However, future trends indicate that the issuance and trading of tokens may shift to separate securities exchanges, similar to how stocks are traded freely regardless of their issuer.
Conclusion
Fractional investing provides an accessible route for a broader range of investors to diversify their portfolios with assets that were traditionally out of reach. As the trend gains momentum, understanding how it works and the opportunities it offers becomes increasingly vital.
By embracing fractional investing, investors can diversify their portfolios and participate in lucrative markets without having to invest large sums of money. The approach democratizes asset ownership and provides a more equitable investment landscape for all.