What Are Fractional Shares and Where Can You Buy Them?
A fractional share is exactly what the name suggests: a fraction of a share. Instead of putting all your savings into one full Alphabet Inc. share for $2,000, you could buy 0.1 share for $200 or even 0.01 share for $20. Many online brokerages and mobile apps now offer fractional shares, making investing more accessible and budgeting much easier for the average investor.
There are many solid large-cap companies, exchange-traded funds and mutual funds, but the minimum to invest is often thousands of dollars. These high costs can make it difficult to create a diversified portfolio within budget when you’re just starting out. Luckily, fractional shares can make all the difference.
To simplify your financial planning further, brokers won’t force you to make calculations to figure out complex decimals and fractions when buying shares. You can simply input a dollar amount, and it will automatically be converted to a fraction of a share.
Benefits of Buying Fractional Shares
There are a lot of reasons you might want to start buying fractional shares. They open doors for all investors, but especially for those who are new to investing. Three major reasons are affordability, diversification and lowered risk.
Investing with fractional shares means you can conveniently put in a set amount of money at regular intervals to start investing early and consistently. As a result, you’ll never have to let cash sit around in order to save up for an investment. You can start dollar-cost averaging money into the stock market right away.
This also lowers the barrier to entry for many young and beginner investors since they’ll be able to buy slices of companies they otherwise wouldn’t have been able to afford. By investing in fractional shares, you won’t have to give up on investing in companies you know and love just because of the price tag.
Not only do fractional shares make investing more accessible, but they also allow investors to have a more diversified portfolio right from the beginning. Instead of putting 50% of your savings into one share of a company, you can divide those funds up in a much more balanced way among 10 or more different companies.
Aside from individual company stock, ETFs can also be bought as fractional shares through some brokers. ETFs are index funds that are traded like stocks and are a quick way to add a significant amount of diversity to your portfolio.
The low risk of investing with less money makes it less intimidating for those just starting out. With just a few dollars, you can test the waters and learn along the way instead of being fearful of entering the market. Once you break the ice and gain hands-on experience, it’s much less scary to invest more.
How Dividends and Stock Splits Affect Fractional Shares
You can buy fractional shares of dividend-yielding stocks and receive dividend income just as you would with a normal share. The dividend amount will be proportional to the fractional amount of a share that you bought. If the dividend yield for one share of a $100 stock is $1 and you bought half a share, the dividend yield would be 50 cents.
Stock splits are similarly proportional. In a two-for-one stock split, your number of shares is doubled, but the price of each share is halved. If you had two shares of stock worth $100, for example, those would become four shares worth $50 after the split. Stock splits affect fractional shares in the same way. If you had 2.5 shares of a stock worth $100 per share, you’d have five shares worth $50 each after the split.
Where Can You Buy Fractional Shares?
The most well-known platform for buying fractional shares is Robinhood because it was the first to extensively offer the service. However, there are quite a few more brokers and mobile apps offering fractional shares now due to their rising popularity, especially among young investors.
Some are more limiting than others, but you can choose the one that best suits your needs. Make sure to understand each broker’s fees, minimums and selection of available assets before committing to a platform. Although some brokers allow fractional share purchases of any stock or ETF, many limit the options to companies based on certain exchanges, indexes or other criteria.
Here are some of the most popular platforms and brokerages offering fractional shares with low minimums:
|Platform||Asset Types||Minimum Buy Price||Recurring Fees|
|Robinhood||All stocks and ETFs||$1||$0|
|Public||All stocks and ETFs||$5||$0|
|M1 Finance||All stocks and ETFs||$100||$0|
|Fidelity — Stocks by the Slice||Any stock listed on the National Market System||$1||$0|
|Interactive Brokers||Any stock listed on U.S. exchanges||$1||$0 (but beware of inactivity fees on Pro accounts)|
|Charles Schwab — Stock Slices||S&P 500 companies||$5||$0|
|Stash||Select stocks and ETFs||$0.01||$1/month to $9/month|
|SoFi Invest — Stock Bits||Fewer than 50 stocks||$1||$0|
|Betterment||ETFs automated by robo-advisor||–||0.25% annually|
|Source: The Balance|
The Downsides of Fractional Shares
The largest downside of investing with fractional shares is the inconvenience of transferring them to a different broker. Although account transfers are typically simple to execute when the account has only whole shares, it’s more complicated with fractional shares.
Sometimes, it’s not even possible. Investors are often required to sell their fractional shares to transfer them as cash instead. This means you could lose some of your favorite positions if you wanted to switch to a new broker.
The second downside is psychological. While lowering the barrier to entry for investing is undoubtedly great, it could also make investors a little too hands-on with their investments. Because of the lower risk, investors might start actively trading instead of investing for the long term.
Whether investing in fractional shares or whole shares, most investors should stick to the principles of long-term investing and practice patience with their investments.
Alternatives to Directly Buying Fractional Stock Shares
If you’re using a broker that doesn’t offer fractional shares or you simply prefer not to invest fractionally into company stock and ETFs, there are some similar alternatives you can consider. Just a few investment options are:
- Fractional mutual funds: Most mutual funds can be bought as fractional shares. Many large brokerages such as Vanguard offer them. However, mutual fund minimums can be expensive, so make sure to do your research on each fund.
- Fractional dividend reinvestment plans: These plans will automatically reinvest your dividend income into fractions of the underlying stock.
- Low-cost ETFs: There are many affordable index ETFs that will give your portfolio plenty of diversity and still allow you to employ the dollar-cost averaging strategy.
Fees and minimums are subject to change.
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