If you’re relatively new to learning how to invest money, it can be difficult to know where to begin or where to focus your efforts. Finding the right investments for your portfolio, developing a budget, knowing when to buy or sell, and learning how to rebalance — it’s easy to see how everything can quickly become overwhelming when you’re learning how to invest.
But whether you’ve already dipped your toes into the world of investing or you are just getting started in the stock market, there is an investment strategy you should know about: the fractional share.
What are fractional shares?
When you purchase a stock, you are essentially buying a share of a company and its equity. That share represents a sliver of ownership of the company. How much ownership you get for that share will depend on how many shares the company has issued.
Shares of stock can be purchased from a shareholder, rather than from the company directly, by going through a broker. Although traditional brokers still exist (think calling up a stock broker and asking him or her to place a share order for you), many of today’s stock purchases take place through online brokers and investment accounts.
Traditionally, you could only buy whole shares of a company. And if a company is valuable, that can be very expensive — possibly thousands of dollars for one share. When you buy a fractional share, as the name implies, you are actually buying a partial share, or a share of a share.
Although each brokerage handles things differently, a fractional share could represent a half or a quarter of a standard share. This means a company with a high stock price could suddenly become an accessible investment for investors just starting out. And although fractional investing is more popular with online brokerages and investing apps, even some traditional brokerage firms — like Charles Schwab and Fidelity — are now beginning to expand their offerings to include fractional shares.
The advantages of buying fractional shares
There are many reasons you may want to consider buying fractional share investing, especially if you are investing for the first time or are working on building a strong portfolio:
Beginners can dip their toes in the investment waters
Fractional shares could be great for beginner investors, especially those without a lot of money and/or investing knowledge. Rather than focusing your efforts in one place by buying full shares, you can dabble in a number of different industries to see what moves you toward your personal finance goals.
They help you more easily diversify
Often, investors pick funds, specific stocks, or industries that interest them, feel safe, or have performed well in the past. They may not venture far from those trusted investments, resulting in a portfolio that isn’t diversified. With fractional shares, you can test a variety of stocks without a significant investment, which allows you to safely and strategically branch out.
You can start earlier, for less
Many traditional brokerage accounts have what’s known as account minimums. This means there is a minimum requirement for the number of shares you need to buy at once or for the dollar amount you’re required to invest. This can be prohibitively high for newer investors.
In contrast, many online brokerages that offer fractional shares — like Stash or Robinhood — have low or no minimum investment requirements (in addition to already being some of the best investment apps around).
They’re more affordable
Right now, a single share of Berkshire Hathaway Inc. stock is going for more than $300,000 and Amazon’s share price is sitting at just over $3,100 (as of Aug. 11, 2020). Unless you have that kind of cash ready to be invested and are willing to risk it all on an individual stock, you’re completely out of luck as an investor. So if you’re wondering how to buy Amazon stock, for example, fractional trading could be the answer. With fractional shares, you can buy a 0.1 share of Amazon for about $300.
They make dividend reinvestment easier
Over time, you may receive dividends from your investments, which you can reinvest to grow your portfolio even further. Rather than wait weeks or months until you have enough built up to purchase a full share, you can put your money to use immediately by buying fractional shares. After all, when it comes to investing, time is the biggest factor on your side.
How to buy fractional shares
As mentioned, not all brokerages offer fractional shares, especially the traditional ones. There are a number of online brokerages that do offer these smaller investment shares, though. If you’ve already been studying up on how to invest in stocks online, adding fractional shares to your portfolio could be a piece of cake.
To help you get started, here are a few investing platforms that offer fractional share trading:
Stash provides you and even your kids (depending on the plan you choose) with an easy-to-manage personal investment account, from which you can sell or withdraw your funds at any time. Stash allows you to invest in tax-advantaged retirement accounts, such as traditional IRAs.
Through Stash, you are able to purchase fractional shares of a company’s stock in any dollar amount. This means you can buy $5 worth of Coca-Cola Co. or $20 of Berkshire Hathaway Inc., if you so desire, allowing you to build the portfolio you want and can afford.
Who Stash is a best fit for: Investors who want an easy portfolio management platform, the ability to buy fractional shares, and features like investment rewards on everyday purchases.
With Robinhood, investors can enjoy commission-free trades on stocks, options, exchange-traded funds (ETFs), and cryptocurrency. There is no minimum account balance requirement to get started, and you can begin trading on the streamlined platform in minutes for free.
Robinhood allows you to buy fractional shares on thousands of different stocks, and these can be purchased for as little as $1 each. Unfortunately, you are unable to invest in retirement accounts, such as IRAs, mutual funds, or bonds through Robinhood. You’ll also be charged a $75 fee if you ever want to transfer your assets out of Robinhood, so keep that in mind.
Who Robinhood is a best fit for: Beginning investors interested in niche options like fractional shares and cryptocurrency, with no minimums or fees.
As a social investing app, Public allows you to not only invest commission-free in stocks and ETFs, but you can also follow specific people or companies, join in group chats, and even ask questions in public forums. Fractional shares are available for as little as $5, and there are no commission fees to worry about.
Because Public is a newer app, it’s hard to tell what future updates will bring. The company states that there may be fee-based features introduced down the line, for instance. Also, it’s important to note that Public is designed to be a mobile app, so managing your portfolio from your desktop isn’t an option.
Who Public is a best fit for: On-the-go investors who appreciate a social experience, like being able to watch what other investors and companies are doing, or chatting with similar users.
Through M1 Finance, you can invest, spend, and even borrow while curating the perfect investment portfolio for you and your interests. Fee- and commission-free investing is offered with fractional options available starting at 1/100,000th of a share. You can build a portfolio pie through M1 Finance that accounts for all your interests and preferences, with the ability to diversify and rebalance using full or fractional shares.
There is a $100 minimum requirement to get started with M1 Finance, which may dissuade some beginners. There is also a limited trading window each day, which may eliminate day traders and other more experienced investors.
Who M1 Finance is a best fit for: Investors who want a one-stop-shop cash management option, including portfolio loans and integrated debit cards.
While Betterment doesn’t allow you direct access to make fractional purchases of individual shares, it does employ fractional investing strategies with its ETF offerings. By allowing fractional purchases of funds, Betterment makes it easy to maintain the target allocations of your portfolio and to reinvest your dividends. You don’t have to wait until you have enough for an entire share of an ETF before you can put that money back to work.
Betterment has no minimum balance requirement. It also provides advanced tax-saving strategies no matter what kind of investor you are. Betterment does charge fees to investors on its platform. Depending on which plan you choose, you can expect to pay between .25% and .40% of your assets under management in the form of an annual fee.
Who Betterment is a best fit for: Investors who want to sync external accounts to get a comprehensive view of all of their assets in one place, with features like fractional shares and automatic rebalancing.
FAQs about fractional trading
Do fractional shares pay dividends?
If you own fractional shares of a company that pays out dividends, you can expect to also receive a dividend portion as scheduled. It’s just important to recognize that if you own 1/1,000th (or 1/1,000,000th) of a stock, your piece of the dividends will be proportionate.
Is it worth buying fractional shares?
Fractional shares are a great way to purchase shares in a company that might otherwise be out of reach due to cost. You can also use fractional shares to diversify a portfolio, rebalance your investments, or even create a dividend reinvestment plan that doesn’t require you to have enough saved up to buy full shares.
Can I buy fractional shares of Amazon?
Many big companies offer fractional shares to investors, making them accessible even to beginners. For example, you can buy fractional shares of Amazon, Apple, Coca-Cola, Google’s parent company Alphabet, Hershey, and even Tesla.
Pro-tip: When learning how to invest in Tesla, fractional shares allow you to get started with a minimal investment.
Can you make money off fractional shares?
With any stock purchase, there is the potential to either lose or make money based on that company’s success. If the price of shares you own goes down, you will lose money. If the price of shares goes up, so will your portfolio’s value.
Of course, if you own a fractional share, you will be eligible only for a sliver of any positive proceeds. But when you’re talking about a curated and diversified portfolio, these returns can add up just as quickly as if you owned full shares.
Note: We are not financial advisors, so please consult a trusted professional if you need personalized advice. Also, keep in mind that investing always involves risk, and there is the potential to lose your investment at any time.
Seeking out and buying fractional shares isn’t for everyone, but fractional trading can make investing easier and more affordable for beginners who might not have the cash to build a diversified portfolio. These slivers of shares allow investors to buy stock in companies that might otherwise be out of reach.
Fractional shares also make it easier to diversify an existing portfolio and rebalance investments in a more exact way. And if you have dividends or interest that you plan to reinvest, fractional shares allow you to put that money to work as soon as it’s available, rather than waiting until you have enough earnings to buy full shares.
Not every investment company offers fractional share trading, though it’s becoming easier to find (especially within the more popular platforms). With the ability to buy these slivers of shares for as little as $1, it’s easy to see how their popularity has grown.
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