The allure of investing in the stock market may be a pipedream if you believe that thousands of dollars are needed to get started. Indeed, some stock shares these days are big-ticket assets. Alphabet (Google’s parent company) is worth more than $2,700, while Amazon clocks in north of $3,000. With such dollar figures on the line, not everyone who’d like to own these stocks can pony up the cost of a single share.
Luckily, you can get involved with big-ticket companies without owning a whole share of stock. Whether you’re just starting small or simply prefer working with an investment sized by dollars, this guide will explore fractional share investing and why it gives you a better shot at owning shares of your favorite stock.
Understanding a Fractional Share
When you buy shares of a stock, you are buying ownership in a publicly traded company. So, you’ll own equity in the company. Stocks are usually sold in parcels called shares, and the owners of these parcels are called shareholders.
A fractional share is a part, portion, or fraction of a single share of a company. Since it’s less than a whole share, a fractional share lets you own equity in a company without owning the full value of a whole share.
A stock’s price per share doesn’t necessarily represent the value of a company. Instead, the value of a single share of stock comes down to the number of shares the company has availed for public purchase, known as shares outstanding.
Fractional shares may sometimes be the result of a company’s actions or financial decisions. For instance, stock splits may leave you with fractional shares if you have an odd number of stocks. Two companies that merge to combine stocks using a specific ratio may also generate fractional shares. You could also end up with fractions of a share if you reinvest your dividends as part of a company’s dividend reinvestment plan.
You typically won’t buy or sell fractional shares on the major stock exchanges. Instead, you can open a brokerage account and buy a fractional share for as little as $5. A brokerage can bundle several fractional shares to make a full share, sell you a percentage of one share, or split full shares to sell fractions.
A company may pay out dividends to its shareholders in an amount that corresponds to the number of shares each investor owns. Similarly, owning a fractional share lets you receive a dividend, which will be a corresponding fractional amount.
Can You Buy Partial Shares of Stocks?
Yes, you can buy partial shares of stocks if you’re using fractional shares. Fractional share investing lets you own stocks of different companies without buying an entire share. This way, you will use the dollar amount at your disposal to build a portfolio.
For instance, you are a rookie investor who only has $500 to start buying shares. If the stock you want to purchase is trading at $1,500 per share, the share price puts the stock out of your reach. Thanks to partial shares, you could still use the $500 to buy a portion of the whole share. Then, once you have another $500 to invest, you could buy another portion of the share. With small dollar increments, you’ll eventually own one full share of the stock.
How Much Does a Fractional Share Cost?
The cost of a fractional share depends on the brokerage you are using to trade. Most brokers require a minimum of $5–$10 to trade fractional shares. Your broker may also charge a fee for every trade of fractional shares that you execute. While some brokers offer commission-free trades, others may charge you on a per-trade basis or as a monthly fee.
Do Fractional Shares Pay Dividends?
Sometimes, company actions like mergers and stock splits may create fractional shares. Reinvesting dividends in a company’s dividend reinvestment plan may also create portions of shares. However, even though fractional shares are a portion of full shares, they won’t function differently than full shares.
Fractional shares pay the requisite proportionate dividends provided the stock you own pays out dividends. If you own 40% of a share, you’ll receive 40% of the dividend that a whole share pays. Dividends are part of a company’s profits that the business may choose to give back to its investors, therefore providing each fractional owner a portion of the profits.
Companies may pay out dividends at the end of each fiscal year or quarter in amounts corresponding to each shareholders’ stock ownership. You may receive dividends in cash or as more stock, known as dividend reinvestment.
What Types of Brokerages Offer Fractional Shares?
Fractional share investing isn’t available at all brokerages. In fact, most of the brokers that let investors trade fractional shares are non-traditional fintechs and are not your usual big-name investment firms. Even so, many brokers are gradually opening the doors to fractional share investing.
Fractional shares are mainly available through app-focused online brokerages, such as Charles Schwab, SoFi, Fidelity, Interactive Brokers, M1 Finance, and Betterment. Some will let you buy fractional shares with as little as $1.
Why Invest in Fractional Shares?
People who can’t afford a single share of stock can still become shareholders by buying a slice of the share. Fractional share investing can be a meaningful way for rookies to dip their toes in the stock market. However, fractional share investing has its benefits and downsides.
Benefits of Fractional Shares
No Barriers to Investing
The main benefit of fractional shares is that you can own part of a stock whose share price may otherwise be too expensive. Thus, fractional shares eliminate the financial barrier that most beginner investors encounter if they do not have sufficient capital. With minimums as low as $5, fractional shares enable young investors to access the stock market and learn firsthand. This hands-on approach to the stock market may be a better form of trading education than approaching investment concepts or ideas in theory.
Since investors can purchase portions of different stocks, it’s easier to build a more diversified portfolio. By buying various investments, you can reduce the amount of risk in your portfolio should there be a market downturn.
Fractional shares let you control the precise amount of money you will spend on a stock, and you don’t need a huge chunk of change to build your portfolio. With more control over how much you’re putting into the stock market, you can preserve your gains to trade in the stock market for a longer period. Furthermore, fractional shares will help you purchase stocks you actually want to hold in your portfolio, not just what’s affordable.
With fractional shares, you can craft a strategy based on the desired amounts for each stock. Ultimately, the dollar value of your investment may be a multibagger strategy for you.
You Can Gain Experience
If you’re just getting started, trading stocks may feel intimidating. However, owning a few dollars of a business may open new doors to the investing world. Tangible ownership may bring some investing lessons to life and spark interest in analyzing companies and the overall economy.
Building financial literacy isn’t just about knowing facts and figures about money. The lessons you learn by experimenting and implementing can be long-lasting. Low-stakes practice and mistakes will not only help you understand the mechanics of investing but also help you examine your strategies and preparedness for market volatility.
Downsides of Fractional Shares
Some brokerages will charge you every time you buy or sell a stock, so you’ll pay a trading commission whether you buy a whole or partial share. A $1 transaction fee for buying or selling shares may seem negligible, but it may quickly rack up for investors with little starting capital.
With fractional share investing, you may need to make more trades until you can own a full share. You may subsequently incur more commissions if your broker takes a fee for every transaction you make.
May Not Be Available
Fractional share investing has, indeed, become a common feature for most brokerages. Unfortunately, traditional brokerages may not allow this type of trading. They may also impose restrictions on the sale of fractional shares since they must be joined with other fractional shares to create one whole share.
Considerations Before Investing in Fractional Shares
If you’re looking to take the fractional share investing approach, here are some important aspects to consider:
- Availability. Fractional share investing may not be available on every brokerage platform. And even when it’s available, it may not be open to all customers. Contact your broker to find out whether it offers the service.
- Types of securities. A broker may restrict the types of securities you can own through fractional shares. Some brokers allow fractional shares of stocks, while others will allow it in stocks and exchange-traded funds (ETFs). There could also be a limit to the types of stocks and ETFs available. For instance, some brokers may only allow you to own fractional shares of stocks in the S&P 500 index.
- Trade execution. There are brokers who will let you trade fractional shares in real time just like whole shares. Others may need to aggregate fractional share orders throughout the day and execute them as one or more large orders. Be sure to check how your brokerage handles orders to purchase or sell fractional shares.
- Fees. Depending on your broker, you may incur a fee for every fractional share transaction you carry out. Check your brokerage’s commission and fee structure to understand what applies in your situation.
- Dividends and other corporate actions. Owning fractional shares still makes you eligible to receive dividend payouts and take part in corporate actions like stock splits. You’ll typically take part in these actions based on the portion of a whole share that you own.
Fractional shares are a good way to enter the stock market, build a diversified portfolio with little capital, or take the tough math out of investing. As you choose a brokerage, be mindful of the trading fees. Working with a brokerage firm that doesn’t charge commissions or additional fees for trading fractional shares may give you more freedom to invest the amount of money you want. Fractional shares can also be the foundation of a long-term investment strategy since you can grow your portfolio in smaller increments.