Fractional Share: What It Is, Why It Matters, and How To Invest In It
Are you curious to learn more about the stock market but intimidated by high ticket prices? Not sure if investing is worth your time and money? Worry not, because fractional share could be the answer you’re looking for!
It's a great way for first-time investors to enter the stock market without breaking their budget. Indeed, it allows individuals to get exposure to some of the world’s biggest companies with a much smaller amount of money than buying whole shares would require.
With fractional investing, you can invest in Amazon today for only $1! How?
In this post, we'll explore what exactly ‘fractional share’ is, why it matters, and how you can get started with investments instantly!
And as a bonus, we'll reveal our real-money portfolio - built with 90% fractional stocks...
Table of Contents
- What are fractional shares?
- How do fractional shares work?
- How do you buy or sell fractional shares?
- Is it worth buying fractional shares?
- Do you make money on fractional shares?
- Can I buy dividend stocks as fractional shares?
- What are dividend reinvestment plans?
- What happens to fractional shares from reinvested dividends when you sell?
- Can I buy exchange-traded funds ETFs as fractional shares?
- What about stock splits with fractional shares?
- Can you transfer fractional shares?
- What are the drawbacks of fractional shares?
- Is $1 enough to invest in stocks?
- Full shares vs. fractional shares: conclusion
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What are fractional shares?
As its name suggests, it represents stock ownership of a fraction of a share.
Let's take a single company as an example; you want to invest in an Apple share, with a hypothetical stock price of $150.00. Buying one share would cost you $150.00 (+ transaction fees, if any).
Most brokerage firms will let you purchase fractional shares; in this example, you'd spend only $15 and get 0.1 share - and become an Apple shareholder in the process!
Depending on your brokerage account, not all stocks can be bought as fractional shares. In another article, we explored the top five reasons to start investing today rather than later if you're still unsure about its advantages.
How do fractional shares work?
A fractionally split share usually behaves similarly to a full share, offering the same benefits. A fractional investor is entitled to the same percentage gains/losses as somebody who holds a whole share.
Referring back to our earlier example of an Apple share. This is what happens in both cases when the share price goes up 10%:
Somebody who bought a full share is up $15.00
Someone who purchased 0.1 share is up $1.50
-> both are up 10%, regardless of the amount invested! That's the beauty of fractional share purchases, for a single stock you can get the same percentage return as someone who invested 10x times more than you. Fractional shareholders receive dividends too (where applicable).
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How do you buy or sell fractional shares?
If you are looking to open an investment account, make sure to check which brokerage firms offer fractional shares. Certain companies may use fractional orders differently.
Similarly, online brokerages who apply a minimum spend may restrict you if you have less money to invest. For instance, if the minimum order for common stock is $50, you could not get the 0.1 share of a stock you considered (see above), even if the brokerage firm does offer fractional shares.
Through your investing platform, you should be able to buy fractional shares in 2 ways:
Dollar amount: you want to allocate $30 to a company's stock. With the earlier example of $150 for 1 share, you would get a 0.2 fractional share.
Number of shares: If you want to buy half a share; your brokerage firm would charge you $75.00.
Is it worth buying fractional shares?
Purchasing fractional shares is a great move for new investors. The stock market has historically proven to be an excellent wealth generation tool, as we detailed in our article Why the Stock Market Should Be On Your Radar.
Here are some of the advantages offered by fractional shares:
Lower barrier to entry: you don't have to buy a whole share anymore and can start investing in stocks with $1. Invest in multiple assets with smaller amounts of capital.
Diversified portfolio: diversification in investing is essential. Fractional share reduces the dollar amount needed to build a great portfolio - see below our $20 portfolio
Dollar-cost averaging: a technique that involves purchasing shares at regular intervals, regardless of market conditions. More about this in our Investor Mindset blog post.
Learn and limit risks: when you buy fractional shares, you can experiment with different strategies and gain experience without risking large amounts of capital upfront.
Tax advantages: investing in fractional shares can be an effective way to offset capital gains taxes. Whenever you invest in any type of asset, it's important to understand the tax implications and benefits of doing so - speak to a professional such as a certified financial planner.
Do you make money on fractional shares?
Yes, you can make money with fractional shares, exactly in the same way as owning whole shares. Historically, investing in the stock market has generated an average annual return of 10%.
Fractional shares investing is a great way for new investors to gain exposure to stocks while limiting risk and taking advantage of lower barriers to entry into the market - all without sacrificing potential returns!
Can I buy dividend stocks as fractional shares?
Yes, if your broker offers fractional shares, most likely some of the companies available will be dividend stocks. The dividend payments will simply be pro-rated. If the dividend payment is $10 when you own a whole share, you'd get $5 by owning half share.
What are dividend reinvestment plans?
Investing in a dividend reinvestment plan (DRIP) is an excellent way to grow your portfolio further, as all the proceeds generated from dividends are used to automatically reinvest and acquire more shares of a company - this create fractional shares.
What happens to fractional shares from reinvested dividends when you sell?
When you sell fractional shares that were acquired through reinvested dividends, the proceeds of the sale will be calculated based on the proportionate amount of whole shares owned.
Some brokerages may charge you an extra fee for liquidating fractional shares as opposed to whole ones.
Mergers and acquisitions can also create fractional shares when companies merge and combine stocks using a predetermined ratio.
You might like: Ask Me Anything: 5 Answers to Your Questions About How to Be Financially Successful
Can I buy exchange-traded funds ETFs as fractional shares?
Yes, you can buy fractional shares ETFs, and index funds. Exchange-traded funds are efficient to build a diversified portfolio faster.
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What about stock splits with fractional shares?
While a stock split doesn't change a company's valuation, these corporate actions often hit the headlines and get investors interested in the stock.
As with dividend payments, you will receive a number of shares pro-rota to your holdings when the stock split occurs. Stock splits are often decided to make investing more accessible.
Can you transfer fractional shares?
In most cases, fractional shares are not transferable. If you close your account or transfer it to another brokerage firm, you'd need to sell fractional shares, resulting in potential commission charges. Looking for a new broker? Check our top recommendations.
What are the drawbacks of fractional shares?
As we illustrated above, there are many benefits to fractional shares. However, there are some flaws that full-share investors would not encounter:
Fractional shares do not have voting rights. You only get voting rights for the whole shares that you own and not your fractional holdings;
Unless your broker offers commission-free trading, it may not be worth spending a small amount on a fractional share as the associated fees will impact your return;
Not all publicly traded stocks are available for fractional share investing;
You can make (more) bad decisions. Investors may want to invest more shares or choose a company they wouldn't have otherwise bought. Spending smaller amounts do not mean you shouldn't research a stock and apply due diligence.
Fractional shares are not transferable (see above);
If you own a very small portion of a share, your broker may keep your dividend. For instance, when your fractional share entitles you to less than 1¢ in dividends, you may not receive any money, but that amount could be meaningful over the long term.
Is $1 enough to invest in stocks?
Whilst some brokerages may have a minimum amount to deposit funds, companies such as Trading212, Lightyear, or Revolut will let you spend $1 only on a fractional share.
Interactive Brokers has also reduced fees to remain competitive.
Here is an example of one of my real-money portfolios; perfect for investors with limited funds:
This is year 2 out of 20, investing $20.00 a month (dollar cost averaging). Click here to view the live portfolio.
Full shares vs. fractional shares: conclusion
Fractional share investing can be a great way for investors to get started with stocks, especially if you have limited capital or are looking for a more cost-effective way to diversify your portfolio.
While they offer an advantage over full shares when it comes to affordability and flexibility, there may also be additional fees associated with trading them as well as limitations on voting rights and dividend payments. It’s ultimately up to each investor to decide whether buying fractional shares is the right choice for their individual financial goals.
No Financial Advice. This article does not provide financial advice and has been prepared without taking into account any person’s investment objectives, financial situation, or particular needs.
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