Equities Trade “DIRTY” – What that Means and Why it Matters

Overview: The purpose of this whitepaper is to educate readers about a flaw in our market structure, that causes income-producing securities to trade “Dirty." Dirty security pricing causes investors to pay inflated values for income-producing securities and then...

This article describes how investors, who buy investment funds using FairShares technology, can buy more shares of a FairShares fund than they can of an equivalent traditional fund.  Traditional investors are buying a dividend, which reduces their invested capital.

As we have previously discussed in other blogs, the dividend premium drives up the prices of securities.  The process of inflating the value of an investment fund impairs an investor’s buying power, which limits the number of shares that can be purchased with the same amount of dollars. 

The concept of how the last holder of record system impairs an investor’s buying power is easy to understand and applies to every investor, whether they are investing in a qualified or non-qualified account.  An investment fund that costs $100.00 per share and pays a $1.00 per share dividend tomorrow is not worth $100, yet that is what you will pay.  Of the $100.00 price, $99.00 per share out of the total represents the value of the underlying securities, and the remaining $1.00 per share represents the embedded dividend.  Tomorrow when the fund declares its dividend, its price will drop by $1.00 per share to $99.00 and you will be owed a $1.00 per share dividend payment.  Unfortunately, you will pay ordinary income tax on the return of your own money ($1.00 per share), which causes instantaneous losses, as the tax liability created upon the purchase will lower the investor’s net worth.    

My point here is that the shares you paid $100 for, were not worth $100.  They were only worth $99.00.  Yet, the last holder of record system forces you to pay this $1.00 per share premium.  If you bought these same securities from an investment fund using FairShares distribution system, you would only have to pay $99.00 per share because FairShares does not account for dividends as assets of the fund.  Dividends are payable by law and are therefore FairShares improves the accounting used by accounting for dividends as liabilities payable/declared which removes the dividends from the NAV.

Let’s look at the buying power advantage of a fund using FairShares technology, assuming a $1M purchase. 

  • Traditional Fund ($1,000,000 / $100) = 10,000 shares purchased
  • FairShares Fund ($1,000,000 / $99) = 10,101 shares purchased

There you have it; both investors purchased securities with the same amount of money.  However, the FairShares investor was able to purchase 101 more shares with the identical amount of capital. 

We should also note that each one of these additional shares pays a $4.00 per share annual dividend.  Therefore, not only did the FairShares investor buy more shares, but the FairShares investor will make an additional $400 per year – for as long as the shares are held.    

Now let’s look at an example using real data showing how buying a FairShare investment fund allows an investor to buy more shares.  The chart below was calculated based on the dividend premium in FXAIX.  We explain how the dividend premium is calculated HEREAs previously discussed, the dividend premium diminishes an investor’s buying power.  As the dividend premium grows throughout the payment period, an investor in FXAIX can buy fewer and fewer shares. 

The chart below was constructed from actual data to show you how many more shares of an investment fund can be purchased, on any given day of the period, if a fund like FXAIX adopted FairShares technology to remove the dividends from the value of the fund.  Let us assume that an investment advisor, on behalf of their clients, intends to purchase $10M worth of an S&P 500 investment fund.  The number of additional shares that can be bought is calculated by multiplying the dividend premium as a percentage of the NAV by the total investment amount.  This product represents the amount of your money that will be used to purchase the dividends embedded in the price of a traditional fund.  Next, we divide that amount in dollars by the price per share of the investment fund to calculate how many additional shares could be purchased if you didn’t have to pay the inflated cost of a traditional security and buy a dividend.  The purpose of this exercise is to determine how many extra shares an investor could buy if they didn’t have to buy a dividend.

According to the chart below, if we compare a traditional investment fund with an identical fund that uses FairShares technology, the investment advisor who purchases the FairShares fund on 8-30-2019 will be able to buy 300 more shares than an investment advisor would be able to purchase in a traditional fund.  Further, an investment advisor who acquires a FairShare fund on 9-27-2019 will be able to buy 485 more shares than an investment advisor would be able to purchase in an equivalent traditional fund.

To conclude, as the dividend premium builds in the NAV over the course of the payment period, the buying power of an investor in a traditional fund incrementally decreases as the premium grows.  Therefore, an investor purchasing an investment fund using FairShares technology can progressively buy more shares, with the same amount of capital, when compared with a traditional investment fund that includes dividends in its NAV.  The ability to always purchase more shares increases the yield and the compound annual return of the investor.  By using FairShares – investors will always make more money and will never be subjected to paying taxes they do not owe.

If you want to buy shares for what they are worth, without overpaying, you are going to need to tell your investment advisor that you want to #BuyFairShares .  Please connect with us and share this article on your social media platforms.  Together we can make a difference.


Jeremy Roseberry


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