Fractional Share Investing: PROS & CONS

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November 3, 2022
3 Minute Read

Trading fractional shares are an excellent way for beginner to intermediate investors to gain exposure to stocks and ETFs. While this new way of investing offers considerable upside, investing still involves risk, so you should still do your research and invest wisely.

100 us dollar bill
Fractional share investing allows individuals to invest in securities that were once out of reach for average investors.

What Are Fractional Shares?

A fractional share is when you own less than one full share of stock or security.

Why Invest in Fractional Shares?

Fractional shares are a way to invest when you do not have enough money to purchase a full share of a particular stock or ETF. For example, if XYZ stock trades at $1000 per share, but you only have $100 to invest, fractional share investing would allow you to purchase a fraction of the XYZ stock ($1000/$100) or .1 shares.

How does Fractional Share Investing Work?

Generally, you can place orders to buy or sell fractional shares in dollars or share amounts. For example, if XYZ Stock trades for $1000, you could place an order for a fractional share, such as .5 shares or for a dollar amount, such as $500.  

How you buy and sell fractional shares differs between brokerage firms that provide this service to their customers.

When you purchase fractional shares, you are still entitled to dividends. So if you buy 1/5th of an Apple share, you will also get 1/5th of the dividend.

PROs of Fractional Share Investing

Invest In Expensive Stocks With Little Money

One of the most significant benefits of fractional share investing is the ability to invest in expensive stocks like Tesla, Apple, or Google with very little money.

Tesla trades at nearly $1,000 a share, certainly not cheap. But with M1 Finance, you can gain exposure to Tesla by purchasing a fractional share for as little as $1.00!

Before fractional share investing, expensive stocks were just out of reach for beginner investors. Fractional share investing is democratizing stock market investing for the average investor.

Put Your Extra Cash To Work

If you have extra cash in a savings account, you can put that money to work by investing in fractional shares. Otherwise, you earn close to 0% interest in your savings account.

Dividend & Corporate Actions

When you are a fractional shareholder, you are still entitled to fractional dividends, and other corporate actions such as stock splits or reverse stock splits.

For example: If you purchased $100 worth of company X that trades at $1,000 and the company’s dividend is $10 per share, you own 1/10th of that company, so that you would receive a dividend of $1.00.

Note: Depending on your broker, if your dividend amount is less than 1 cent, your broker may keep the dividend.

Dollar-Based Investing

With fractional share investing, if you have a specific asset allocation, fractional shares allow you to execute that strategy precisely by buying securities in dollar amounts, not shares. This gives you greater control over your portfolio allocation and creates a more diversified portfolio.

Cons of Fractional Share Investing

Not All Securities Are Available For Fractional Share Investing

Depending on your broker, the stocks and ETFs available for fractional share trading may vary. You will be able to purchase most large-cap securities in the S&P 500 via fractional shares, but don’t expect that company that went public via a reverse merger always to be available for trading.

Not All Brokerages Offer Fractional Share Investing

Many more traditional brokerages (think TD Ameritrade) do not offer fractional share investing; however, that is likely to change. Fractional share investing is more prevalent at fintech brokerages like M1 Finance or Robinhood, geared towards a younger generation of investors.

Fractional Shares Cannot Be Transferred To Different Brokerage Accounts

You cannot transfer fractional shares to a different brokerage account. If you decide to change brokers, you may be forced to sell your fractional shares and incur capital gains taxes.

This isn’t likely a huge issue for most investors, but something to be aware of.

Limited Trade Execution

Depending on your broker, some brokerages aggregate fractional share buy and sell orders for clients and only execute once or twice daily instead of in real-time, like full shares. And because of this, you may be unable to execute at the best price of the day.

Furthermore, some companies make fractional share trading available only on their mobile app and only allow market orders.

Again, not a problem for most people, but people should be aware.

Voting Rights

Depending on your broker, you may not have voting rights if you own fractional shares. Some brokerage firms allow it with special procedures, and some do not allow it. Ask your brokerage firm whether you will have any voting rights associated with fractional share purchases.

Best Brokers For Fractional Share Investing

M1 Finance is our favorite commission-free trading platform for fractional shares.

The Bottom Line: Are Fractional Shares Worth It?

Trading fractional shares are an excellent way for beginner to intermediate investors to gain exposure to stocks and ETFs. While this new way of investing offers considerable upside, investing still involves risk, so you should still do your research and invest wisely.

Frequently Asked Questions

Real World Investor

Adam

Adam is the founder of realworldinvestor.com, an investing website dedicated to helping discerning individuals make the best investment decisions.Before starting Real World Investor, he was a Vice President at one of the country's largest investment banks.He has over 10 years of experience working in financial services. His experience includes working with complex derivatives while spending many years working on a trading floor. He has a bachelor's degree in Business Administration, majoring in finance.

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