San Francisco startup Loyal3, the creator of the Customer Stock Ownership Plan, is betting it can encourage more Americans to buy stock -- right from Facebook -- by allowing them to spend as little as $10 for a portion of a share, with no fees.
By piggybacking on Facebook and its network of more than 900 million users, Loyal3 said it customers will be able to skip brokerage fees -- which some say is stirring up anxiety among the discount-brokerage industry that caters to small-time investors.
In a variation on direct stock-purchase plans used by companies like AT&T, where customers buy shares directly from the company, Loyal3 offers only a $10 minimum investment allowing people to buy stocks in lower dollar amounts and increments, including fractional shares.
Loyal3 has set up a website as well as a Facebook application through which would-be investors can select stock in participating companies. Loyal3 said it was in advanced negotiations with several but could not comment on the status for regulatory reasons. It plans to launch as early as later this quarter.
Going one step further, anyone buying stock on Facebook will have the chance to click on a button and alert their friends to what they have just picked up.
“We’re able to remove the friction, the barriers to entry to tens of millions of Americans,” Loyal3 Chief Executive Barry Schneider said.
Despite a proliferation of discount brokerages, the percentage of U.S. households that own stock has stubbornly hovered around 20 per cent for years, according to Federal Reserve data, in part because people are reluctant to spend large sums.
Loyal3 hopes its CSOP will change that by allowing purchases of small amounts of shares with no fees to consumers.
Schneider said more people actually want to invest, particularly in companies with which they feel a bond, but most would prefer to spend $25 or less. That is an expensive proposition at most brokerages, even discount firms, which tend to charge $5 to $10 per trade.
If Loyal3 takes off, Schneider said he envisioned small-timers beginning to be able to invest in more expensive market darlings. Apple Inc., for example, is a $500 to $600 stock after it quadrupled in value over the past two years.
Success for Loyal3 may help Facebook’s strategy of developing a business beyond pure advertising -- on which it now relies for the lion’s share of its revenue -- by encouraging companies to view it as a place for transaction- or commerce-based business.
Deepened customer loyalty Loyal3 would not be the first company to enable trading on Facebook. San Francisco-based Zecco already does that for its clients. Currently, less than 5 per cent of trading comes via Facebook. “It’s going to take some time to mature,” said Zecco chief executive Michael Raneri.
But by working to get companies on board and promoting the program to customers, Loyal3 hopes it can drive faster adoption of Facebook as a share-trading platform. It already claims a dash of Facebook DNA in the form of former Facebook chief privacy officer Chris Kelly, who joined its board in 2010.
While the program appears to target new entrants to the stock market, it has stirred anxiety among existing discount brokerages. Among that group, competition is intense and margins are very thin, said Alex Camargo of research firm Celent.
Loyal3 announced a partnership with Nasdaq last year designed to allow Nasdaq companies to sell shares via Loyal3. But a source familiar with the matter said the partnership broke up when Nasdaq came under pressure from brokerages.
The program is taking shape at a time when individual investors are winning more investment access. The Jobs Act, signed into law last month, makes it easier for retail investors to purchase shares in companies through a practice known as crowd funding, for example.
Loyal3’s plan is to make it easy for people to buy a company’s stock or for companies to distribute shares to extra-loyal customers. It envisions consumers holding onto the shares rather than engaging in day-trading.
To that end, it has set up a back-end system that takes care of the paperwork for the companies and can handle large numbers of investors. The companies would bear the costs, which Schneider described as nominal.
For businesses, the incentive lies in deepened consumer loyalty. Several studies, including a 2008 paper by Australian researchers and a 2000 paper by Bain & Co, have shown that shareholders make better customers. Bain researchers found that investors who doubled as customers spend 1.5 times as much money and generate twice the referrals as the average customer.
Parts of the company’s program have been reviewed by the Securities and Exchange Commission, Schneider said. The SEC declined to comment on any review.