Quantcast
INVESTING

What Is Fractional Share Investing?


 Photo Courtesy: svetikd/E+/Getty Images

If you’re new to investing, you might have your sights set on buying and selling stocks. But there’s a lot to learn before you get started — and you might not be totally comfortable with the level of risk investing can pose. That’s where fractional shares come in; they can be a great way to invest in top companies even if you’re not yet ready to put larger sums of money toward purchasing stocks.

The costs of shares like Amazon and Alphabet (the company behind Google) can often be overwhelming when you’re first starting out. Fractional shares can be a great way to begin investing in such companies, even if you don’t want to pay for a full share. To figure out if purchasing fractional shares might be a viable option for your investing strategy, learn more about what fractional shares are, how they work and how to purchase them.

 Photo Courtesy: Alistair Berg/Getty Images

Traditionally, when you think of buying shares on the stock market, you might imagine buying anywhere from one to five shares of a certain company on the conservative end or up to 100 shares if you want to buy big. If you really believe in a company or are just an excellent chart reader, this can be a great way to go.

But affordability issues can arise when it comes to blue-chip stocks that sell for hundreds or even thousands of dollars per share — they’re relatively stable, which makes them great choices, but they can be prohibitively expensive for some beginners. That’s where fractional shares come in. Rather than purchasing a full share of a stock, fractional shares allow you to buy less than a whole share for a fraction of the market price.

Instead of buying a set number of shares, you can base this decision on the amount of money you want to invest. If you’re using an online broker, your platform can automatically calculate what percentage of a share your chosen amount of money is worth and let you buy accordingly.

How Do Fractional Shares Work?

 Photo Courtesy: wera Rodsawang/Getty Images

Say you want to invest in a well-known company like Alphabet Inc. (NASDAQ: GOOGL) or Chipotle Mexican Grill (NYSE: CMG). That sounds like a great idea until you open your brokerage account app and discover that just one share of GOOGL will cost you upwards of $2,800. As for Chipotle? You could expect to pay in the $1,900 zone for just one share.

It’s worth noting that these stocks are definitely priced on the higher end, and there are plenty of other great companies whose full shares you can purchase for less than $100 apiece. But if you have your heart set on investing in GOOGL or CMG, fractional shares could be the way to go.

Say, for instance, that GOOGL is trading for $2,872.98 a share but that you only want to invest $100 in the company. By letting your brokerage know you only want to spend that dollar amount and entering it into your app, you’ll see that that amount would buy you 0.034807 shares. You may also sometimes end up with fractional shares as a result of stock splits, mergers and acquisitions, or a dividend reinvestment plan.    

The Benefits of Fractional Share Investing

 Photo Courtesy: Xavier Lorenzo/Getty Images

Fractional shares are a relatively new concept, but they’ve already demonstrated they can offer several benefits to investors. Some of the pros of fractional shares include:

Diversification

Say that you have a total of $2,000 to invest. In this case, you’d need to be absolutely sure that you wanted to invest in a single share of Chipotle. Don’t get us wrong — Chipotle is a well-run company, which is why its shares are worth as much as they are.

But there are plenty of other great companies out there that you’d lose the chance to make money from if you dedicated the bulk of your portfolio to a single share. By opting for a fractional share of the famed burrito franchise, you can free up money to invest in other companies as well. This way, if one stock drops in value, it won’t send your entire portfolio into a tailspin.

Start Investing With Less

One of the other major benefits of fractional share investing is that there’s no need to wait until you have enough money to purchase an entire share before you start investing. The faster you get your money into play, the faster you can (hopefully) start generating returns. Through compounding, you’ll be able to earn more money to invest in the future with your gains.

Dollar-Cost Averaging

If you intend to make regular investments in the same company, you can also benefit from dollar-cost averaging. The idea here is to invest the same amount of money in a certain company at the same time every week. Say that you want to invest $50 every week in Facebook (NASDAQ: FB), which, for the purposes of this example, is trading at around $375 per share.

Because stock prices fluctuate, your $50 might buy you a larger fraction of the company on some weeks and a smaller fraction on others. Overall, however, things tend to even out as you build up to a full share over time. In some cases, this can even cost less than buying full shares.

The Downsides of Fractional Shares

 Photo Courtesy: Prasit photo/Getty Images

When it comes to the drawbacks of fractional shares, there are a few things to consider. Some of these include the following:

Limited Selection

Be aware that not all brokerages currently offer fractional share purchases, but there are a few that do. Additionally, depending on the brokerage you choose, you may be able to purchase fractional shares of more companies than others. Robinhood, for instance, offers fractional sharing nearly across the board, whereas brokerages like Interactive Brokers and Webull only offer fractional shares for specific companies.

Liquidity and Transfer

Fractional shares don’t always sell as quickly as traditional shares, which is something to be aware of, especially if you’re a day or swing trader. Brokerages sometimes have to wait for enough fractional sales to come through to build a full share they can sell. Additionally, because not all brokerages enable fractional shares, they aren’t always transferable if you should decide to switch to another platform.

Shareholder Rights and Dividends

Unless you own a full percentage of at least one share, you may not have access to the voting rights that stockholders are traditionally entitled to. You’ll also need to keep in mind that, because your shares are fractionalized, any dividend payments that you receive likely will be as well.

If you’re just getting started, then these considerations may not be that consequential to you just yet.

How to Purchase Fractional Shares

 Photo Courtesy: miniseries/Getty Images

The way you go about purchasing fractional shares may also depend on which brokerage you sign up with. With Robinhood, for instance, you first need to enable fractional sharing in your settings tab.

If you’ve yet to sign up with a brokerage, be sure to do your research into whether the options you’re considering offer fractional sharing. You’ll also need to learn how to enable it on the brokerage’s platform if it’s something you’re interested in pursuing.

Once you’ve enabled the option, click on the “buy” or “trade” button of the stock you want to purchase. There, you’ll be able to enter the fractional number of shares you’d like to buy. If you’d rather enter a dollar amount, look for a settings menu on the screen that allows you to do so. When you click on it, you’ll likely be given the choice to “Buy in Dollars” instead of shares. Select this option and enter the amount you want to invest; the share fraction will be calculated for you, and you can make your trade.

MORE FROM ASKMONEY.COM