A fractional share allows you to buy a portion of a stock instead of having to purchase a full share. This means that even if you have a limited budget, you can still purchase high-priced stocks like Amazon or Tesla. In the past, if you wanted to buy a stock that was trading at $1,000 per share, but you only had $100, you would be unable to invest in that stock.
Fractional shares often exist as a result of stock splits. Stock splits occur when companies choose to increase the number of shares available. This won't always result in an even number of shares, opening up new investors' ability to purchase fractional shares.
Fractional shares allow you to own a piece of the stock market, even with a limited budget. This article will dive into what fractional shares are, how you can buy them, how they're traded, the pros and cons of investing in them, and how they can benefit your portfolio.
Here's a quick example of how fractional shares work:
Let's say you want to invest in Amazon, but the current price per share is $3,200. You can purchase a portion of the stock with fractional shares for as little as $10. This allows you to start investing in the stock market by owning a small percentage of a single share, making it perfect for beginners or new investors with only a small amount of money.
How Are Fractional Shares Traded?
Fractional shares are traded on exchanges just like full shares and are subject to the same market forces of supply and demand. This means the value of your fractional shares will fluctuate based on the performance of the company you have invested in, as well as broader market conditions.
For example, if the company you have invested in announces strong financial results and its stock price increases, the value of your fractional shares will also increase. Conversely, if the company experiences negative news or market conditions, the value of your fractional shares may decrease.
How Can You Buy Fractional Shares?
As an individual investor, you have a multitude of options when it comes to fractional share investing. Whether you are looking to invest in individual stocks, exchange-traded funds (ETFs), or other investment vehicles like mutual funds, trading fractional shares offers a convenient and flexible way to get started.
- Direct Investment: One of the most straightforward ways to get started with fractional share investing is through a direct investment with brokerage firms. Many online brokerage services offer the ability to purchase fractional shares directly, so you can invest as little or as much as you like in a company's stock or ETF. Some even offer commission-free trading. Online brokers are perfect for those just starting to build their investment portfolio.
- Robo-Advisors: If you're looking for a hands-off approach to investing, robo-advisors may be the way to go. All you have to do is make a brokerage account, and you can get started with fractional trading. With robo-advisors, you can enjoy the benefits of fractional shares without having to worry about how to buy or sell fractional shares.
- Fund Platforms: Fund platforms like Fundrise and Stash allow you to start with fractional investing easily. These platforms will enable you to easily invest in real estate, stocks, and bonds, all with a single investment. This option is ideal for those who want to invest in various assets without managing individual investments.
Regardless of which method you choose, investing in fractional shares has its pros and cons.
The Pros and Cons of Fractional Shares
One of the most significant advantages of fractional shares is that they allow you to invest in stocks with a high price tag, such as those in the technology or pharmaceutical industries, without spending a large amount of money. You can start with a limited budget and gradually increase your investment over time, which is excellent for a first-time investor.
By investing in fractional shares, you can diversify your portfolio and invest in a range of stocks, even with a limited budget. Including fractional shares in your portfolio will reduce your overall risk and increase your returns over time, as you won't put all your eggs in one basket.
If you have just $50 to invest, you could spend $10 to buy a partial share of companies in five different industries rather than having to spend your entire $50 to purchase a single share of one company.
Purchasing fractional shares is simple and can be done through many online brokerages. All you have to do is sign up for an account, transfer your funds, and choose the stock you want to invest in. The brokerage will purchase the fractional shares on your behalf, making it a convenient option for those new to the stock market.
- Smaller Returns
When investing in fractional shares, you only own a portion of a single stock. That means you're not making as much money when you sell fractional shares. Fractional shares pay dividends in fractions, so fractional investing isn't the most lucrative option for the average investor or investors looking to make a little more money.
- Increased Volatility
Fractional investing may make your investment more volatile and subject to more significant price swings. This can result in a more unpredictable return on investment, which can be risky for investors who are not comfortable with volatility.
- Limited Control
When investors own a portion of a company's stock, they're buying the right to make decisions in that company. Fractional investors, unfortunately, will not have the same sway in shareholder decisions.
Despite the cons, fractional shares can still be valuable for investors. By allowing you to invest in a range of stocks, they help diversify your portfolio and reduce your overall risk. Additionally, investors can benefit from long-term growth, resulting in a significant return on investment over time. Make sure to carefully consider the pros and cons and understand the risks before making investment decisions.
When to Consider Adding Fractional Shares to Your Portfolio
Knowing when to consider adding fractional shares to your portfolio can be challenging. In this section, we will explore some critical factors to consider when deciding to invest in fractional shares.
One of the biggest benefits of investing in fractional shares is the ability to diversify your portfolio. Suppose you had $6,000 that you were considering investing. By using fractional shares, you have the ability to divide your funds among multiple companies based on a percentage allocation.
For instance, if you chose to allocate 10%, you could invest $600 in shares across ten different companies, irrespective of their individual share prices. This strategy can help you construct a more diversified investment portfolio compared to investing the full amount in a single company. This is particularly important for those who are just starting to build their portfolio and want to minimize risk.
If you have limited funds, fractional shares can be a great option. Instead of having to save up for a full share of a high-priced stock, you can start investing with what you have right now. For example, if Amazon is trading at $3,000 per share, you might be able to purchase 0.1667 shares with your $500.
Over time, as the value of Amazon's stock goes up, the value of your fractional share will also increase. While you may not see the same gains as someone who owns a full share of Amazon, fractional shares allow you to participate in the growth of the company without having to make a significant upfront investment. This allows you to diversify your stock ownership.
It's essential to understand your risk tolerance before investing in fractional shares. As you own only a portion of the stock, you will also receive a smaller portion of any dividends or stock buybacks, and your investment may be more volatile and subject to more significant price swings. If you are an investor comfortable taking on more risk, fractional shares may be a good fit for your portfolio.
If your risk tolerance is moderate, you may not feel comfortable putting all of your money into a single stock like Apple. In this case, you could use a brokerage platform that offers fractional shares to invest their $1,000 in a diversified portfolio of tech stocks, including Apple.
For example, they could invest $500 in Apple and $500 in other tech stocks like Microsoft, Amazon, and Alphabet (Google), all using fractional shares. This spreads your risk tolerance and diversifies your portfolio to a higher degree.
Your investment goals should also play a role in deciding if fractional shares are right for you. If you are looking for long-term growth, fractional shares can be an excellent option. Investing in a range of stocks can benefit from the long-term growth of the companies you invest in, which can result in a significant return on investment over time.
If you want high dividend payouts, you might want to consider investing in something else since fractional shares only offer a fraction of the dividends that you would receive if you were investing in a whole share of a specific company.
Investing in fractional shares can also be a great way to gain experience in the stock market without trading as much money. As you become more confident and familiar with investing, you can gradually increase your investment and build a solid foundation. However, it's essential to have a basic understanding of the market and the companies you are investing in.
Fractional share trading is a great way to enter the stock market, especially for first-time investors. Fractional shares allow you to have a more diversified portfolio, invest in high-value stocks, and benefit from long-term growth in the stock market.
Always contact your financial advisor for investment advice before buying fractional shares, and remember to weigh your options and risk tolerance.