What Are Fractional Shares?

Fractional shares are pieces of one stock, giving investors the option to buy part of a pricey share instead of the whole unit.

Example:

If a stock costs $1,000 per share and you only have $100 to invest, fractional shares allow you to buy 10% (0.1) of that share.

Why Fractional Shares Matter:

  • Flexibility: Allows you to invest an exact amount.
  • Affordability: Makes high-value stocks accessible to more investors.

How Do Fractional Shares Work?

Brokerage firms enable fractional shares by dividing full shares into smaller increments. Buying a fractional share means that you own a percentage of the stock, and your returns track the stock’s performance.

Example:

Stock Price: $500 per share.
Your Investment: $50.
Ownership: 10% (0.1) of a share.
If the stock price increases by 20%, your fractional share’s value rises to $60.

Fractional shares also simplify dividend reinvestment. For instance, if your fractional share pays a $0.50 dividend, it can be reinvested to increase your holding, even if it’s a fraction of a share.

Advantages of Purchasing Fractional Shares

  1. Affordability:
    Own expensive stocks without saving up large sums.
    Example: Instead of needing $2,000 to buy one Amazon share, you can start with as little as $10.
  2. Diversification:
    Spread your investment across multiple stocks or ETFs, reducing risk and allowing for a balanced portfolio.
  3. Reinvestment Opportunities:
    Dividends from fractional shares can automatically be reinvested, creating compound growth.
  4. Precise Portfolio Allocation:
    Allocate exact percentages to specific sectors or stocks to align with your investment strategy.
  5. Accessibility:
    Eliminates the barrier of high stock prices, making it easier for beginners to invest in leading companies.

Disadvantages of Fractional Shares

  1. Limited Availability:
    Not all brokers offer fractional shares, and the selection may be restricted.
  2. No Voting Rights:
    Fractional shareholders typically cannot vote on corporate decisions.
  3. Liquidity Challenges:
    Selling fractional shares may take longer or involve additional steps compared to full shares.
  4. Tax Complexity:
    Managing taxes on dividends and capital gains from multiple small positions can be complicated.

How to Buy Fractional Shares

  1. Choose the Right Brokerage Platform
    Select a broker that offers fractional shares and aligns with your investment preferences.
    Popular Brokers for Fractional Shares:
    • Robinhood: Commission-free trades with a beginner-friendly interface.
    • Fidelity: Offers fractional shares for U.S. stocks and ETFs.
    • Charles Schwab: Fractional share investments start at $5.
    • Interactive Brokers: Ideal for advanced traders with global access.
  2. Open an Account
    Sign up with the brokerage, submit personal details, and link your bank account.
  3. Deposit Funds
    Fund your account to cover your planned investments. Many brokers have no minimum deposit requirement.
  4. Research Stocks
    Identify companies or ETFs to invest in, considering growth potential, industry trends, and performance.
  5. Set Your Investment Amount
    Specify the dollar amount you want to invest instead of purchasing whole shares.
  6. Place Your Order
    Review and confirm your order, including stock selection and investment amount.
  7. Monitor and Adjust
    Track your investments, reinvest dividends, and make adjustments as needed to align with your financial goals.

Benchmarking Fractional Share Brokers

Broker Min Investment Fees Overview
Robinhood $1 None Best for beginners with easy-to-use tools.
Fidelity $1 None Wide variety of ETFs and U.S. stocks.
Charles Schwab $5 None Advanced tools for customizing portfolios.
Interactive Brokers $1 Low commissions Best for advanced traders with global access.

The Best Investing Strategies for Fractional Shares

  1. Diversification:
    Invest in multiple sectors or industries to spread risk.
  2. Dollar-Cost Averaging (DCA):
    Invest regularly, regardless of market conditions, to smooth out price fluctuations over time.
  3. Focus on Growth Stocks:
    Access high-growth companies that may otherwise be unaffordable.
  4. Reinvest Dividends:
    Set up automatic dividend reinvestment to benefit from compounding returns.
  5. Long-Term Focus:
    Hold investments for the long term to leverage the power of compounding and ride out market volatility.

FAQ: Fractional Shares

  • Is it safe to invest in fractional shares?
    Yes, fractional shares are as secure as the underlying stocks. Choose a reputable broker and diversify your portfolio to minimize risk.
  • Can I sell fractional shares?
    Yes, most brokers allow fractional shares to be sold, although the process may vary.
  • Do fractional shares pay dividends?
    Yes, dividends are paid proportionally to your ownership. For instance, owning 0.5 of a share entitles you to half the declared dividend.
  • Can beginners invest in fractional shares?
    Absolutely! Fractional shares are perfect for beginners since they require less capital and make diversification easier.
  • Do fractional shares offer voting rights?
    No, fractional shareholders usually lack voting rights, which are typically reserved for full-share owners.
  • How are taxes affected by fractional shares?
    Taxes on fractional shares follow the same rules as full shares. Keep detailed records for tax reporting.

Conclusion

Fractional shares have transformed investing, making it more inclusive and accessible. They allow investors to diversify, reinvest dividends, and own shares of high-value companies without significant upfront capital.

Choose a reputable broker, develop a clear investment strategy, and practice patience and discipline. With fractional shares, you can steadily build wealth—one fraction at a time.