Trading fractional shares is an excellent way for beginner and intermediate investors to gain exposure to stocks and ETFs with a small amount of capital.
What Are Fractional Shares?
Fractional shares are just what they sound like: fractions of a single share of a stock, mutual fund, or index fund.
Traditionally, if you wanted to invest in a company’s stock, you had to buy at least one whole share. However, some companies’ shares can be quite expensive, which might make it challenging for some people to invest in them. For instance, a single share of companies like Amazon or Google could cost several thousand dollars.
With fractional shares, you can invest in these companies with less money. For example, if a share costs $1,000 and you have only $100 to invest, you could buy 0.1 shares of that stock.
The main advantage of fractional shares is that they democratize investing by making it more accessible to people with less money to invest. They also allow investors to build diversified portfolios with less capital, so if you’re learning how to become an investor, fractional shares are a great place to start.
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 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
Accessibility
One of the most significant benefits of fractional share investing is the ability to invest in expensive stocks like Tesla, Apple, or Google that might be otherwise too expensive for your average investor.
Tesla trades at nearly $1,000 a share, which is 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 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.
Consistent Investment
Fractional shares are great for consistent, regular investing. Suppose you’re using a strategy like dollar-cost averaging (investing a fixed amount of money at regular intervals, regardless of the share price). In that case, you can continue investing the same amount even when share prices increase.
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 can 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 to always 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.
Liquidity Concerns
Selling fractional shares might be more complicated than selling full shares. Some brokerages may only allow the sale of fractional shares under certain conditions, such as during a full account transfer or closure.
Best Fractional Share Brokers
Some popular fractional share brokers include:
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.
