If you’ve ever wanted to invest in a specific company’s stock but didn’t have enough money to acquire even one share, or if you want to successfully diversify your funds, investing in fractional shares could be a good place to start. Investors can purchase a piece, or fraction, of a stock based on a monetary amount they can afford rather than a certain number of shares.
This type of strategy is advantageous for investors who are starting out with a little amount of money but want to establish a diverse portfolio. We’ll go over how investing in fractional shares works in detail and answer the fundamental questions that new investors should have.
How to Buy Fractional Shares
To purchase fractional shares, you must first open an investment account with either an internet broker or a robo-advisor. The major distinction between the two is whether you desire complete control over which fractional shares you invest in or a more hands-off approach. With a robo-advisor, you may define your investment dollar amount and goals, and the robo-advisor will choose your fractional share investments and automatically rebalance to keep you within your investment target range.
Step 1: Do some research on the fractional shares you want to purchase. Because fractional share offers vary per brokerage, understanding which stocks you want to be able to invest in via fractional shares can also assist you decide which brokerage to use.
Step 2: Create an account with an internet broker or a robo adviser. Because not all online brokers or robo-advisors provide fractional shares, you must ensure that the organization you choose provides that option. It is also crucial to know that each brokerage offers fractional shares in slightly different ways, such as:
- Which stocks are available in fractional shares?
- How are deals executed and settled?
Step 3: Put money into the account. When you open the account, you must fund it. Many online brokers accept electronic financial transfers, however it may take a few days for the funds to settle, preventing you from investing right immediately.
Step 4: Finish and track your investment. The main dashboard of most online accounts makes it very simple to monitor your portfolio. Typically, you can see all of your account holdings at a glance, but depending on your online brokerage, you may also be able to use more advanced tools, such as setting up stock alerts or automated rebalancing.
Is There a Drawback to Owning Fractional Shares?
While there are various advantages to investing in fractional shares, the following disadvantages should also be considered:
Stock selection is limited: Just because a stock is publicly traded does not mean you can acquire fractional shares of it. Each brokerage has its own curated list of equities from which investors can purchase fractional shares.
Problems in transferring fractional shares to a different broker: If you want to transfer your account to another brokerage, the fractional shares may not be transferable. To transfer, you may need to liquidate any fractional shares.
Proxy voting may not be possible: Again, each corporation handles proxy voting for fractional shares differently. Make sure you are aware of your company’s policy on this.
Costs: Some brokerages impose additional costs for investing in fractional shares. This has the potential to reduce profits, particularly for small-dollar investments. Find out if there are any costs related with fractional shares and whether they are flat or percentage based.
Trade execution may not occur in real time: If the brokerage with which you are investing does not settle your trade in real time, your cost basis may be affected. Rather than settling each order individually, some firms will settle all fractional shares in one or more bulk orders. Prices will obviously fluctuate over a trading day, so understanding how this will be settled is critical.
Tax returns may be complicated: Because you are purchasing fractional shares and may purchase numerous fractional shares during the year, depending on your investment strategy, you may wind up holding several separate tax lots that may be difficult to match up at tax time. If you own a stock with a dividend that you automatically reinvest, you will have to deal with additional tax lots.
Considerations for Investing in Fractional Shares
Stocks and ETFs available for fractional share investment: Because each online brokerage has its own limited list of stocks or ETFs available for fractional share investing, it is necessary to be aware of this ahead of time. Some companies will provide ETFs, while others will not. Some companies may provide fractional shares of a single firm, while others may not. Before opening an account, make sure to look over each brokerage’s list of fractional share stocks and ETF offerings.
Fees and costs: Some brokerages will not charge commissions when investing in fractional shares, whilst others may. It is critical to understand the brokerage’s policy on this before creating an account.
Account minimums: Many businesses have no account minimums for opening or maintaining an account. Investors can frequently purchase fractional shares for as little as $1. The minimum balance and investment amount will vary from broker to broker.
You will have access to research amenities if you open an account with an online broker or robo-advisor. Brokers will provide analyst ratings of firms, which can help you decide which stocks to invest in.
Educational content: Understanding how to invest, what to invest in, and how to achieve your financial goals is critical. Your brokerage’s educational information can assist you better understand which assets will help you achieve your goals, as well as how to properly use your account amenities to track and manage your investment.
Frequently Asked Questions (FAQs)
What Are Fractional Shares?
A fractional share is simply a portion or fraction of a whole share. When you buy fractional shares, you are purchasing a portion of a stock share. With this method, you invest based on a dollar amount rather than a specific stock’s price or quantity of shares. Purchasing fractional shares gives investors a lower entry point of accessibility, allowing them to enter the market sooner.
While the idea of trading in fractional shares has been present since 1999, it was not generally available—or financially feasible—until 2019. At the time, a few low-cost enterprises provided fractional shares, although this did not survive long.
Around 2019, online brokers substantially reduced their prices to offer cheap or no monthly fees, paving the way for investing in fractional shares to become more advantageous. Prior to 2019, your portfolio may have had fractional shares, although this was most likely due to a few, specific conditions, such as the ownership of mutual funds, stock splits, dividend reinvestment programs, or firm mergers or acquisitions.
How Does Fractional Share Investing Work?
Your experience with investing in fractional shares will vary based on which brokerage you choose. Each brokerage has its unique set of rules, so knowing exactly what is available before investing is critical.
Is it a good idea to buy fractional shares?
Purchasing fractional shares can be advantageous in various ways, including affordability, diversification, and dollar cost averaging.
Affordability: You don’t have to wait until you have hundreds or thousands of dollars to purchase enough stock shares. Many online brokerages allow you to start investing in fractional shares with as little as $1.
Diversification: Investing in small sums and being able to diversify used to be limited to mutual funds. However, given that many brokerages provide fractional shares, investors can choose which firms to invest in and sell the fractional shares at any time, as opposed to a mutual fund, which is purchased and sold as a “basket” of stocks. The ability to invest in a fractional share allows investors to diversify their portfolio rather than placing all of their money into a single firm in order to purchase a particular number of entire shares.
Dollar cost averaging: Because investing in fractional shares is an option, investors can choose to invest a set amount each month, for example. Regular investing allows investors to profit from market price movements while also hedging against risk.
Can You Buy Fractional Shares Through Fidelity?
You can purchase fractional shares through Fidelity. Fidelity makes it simple to register an account and begin investing in fractional shares, with a minimum account balance of $0 and fractional share investment starting at just $1. In fact, Fidelity is ranked as the Best Online Broker for ETFs by Investopedia, so if investing in fractional shares of ETFs is important to you, this company may be a good alternative. Fidelity provides over 7,000 US equities and ETFs in which investors can purchase fractional shares.
Do you make money from fractional shares?
Investing in such modest quantities may not appear to be a viable strategy to make money. If you regard it like a monthly contribution to an IRA or 401k, your tiny investments will build up over time and establish a very beautiful savings account. While a single purchase only buys a bit of a stock or portions of several stocks, investing over months or years allows those fractional shares to grow, potentially into several complete shares of several stocks.
Can Exchange-Traded Funds (ETFs) be purchased in fractional shares?
Yes, certain firms will sell ETFs in fractional shares. Because each brokerage offers different fractional share options, it is critical to determine whether the firm you want to invest with offers ETFs as fractional shares and what other equities are on its fractional share list.
Are fractional shares more difficult to sell?
The answer will be determined by how your brokerage handles the sale of fractional shares. Some brokerage providers do not guarantee fractional share liquidity. This will vary from broker to broker, so keep this in mind when deciding which firm to invest with. The capacity to easily sell a stock or security and convert it to cash is referred to as liquidity. Even if you can buy fractional shares, you may not be able to sell them as readily as complete shares.