Table Of Content
What Are Fractional Shares?
Fractional shares are partial shares of a company's stock that are less than one full share. Instead of having to buy whole shares, investors can purchase a fraction of a share, allowing them to invest in expensive stocks without needing to buy a complete share.
Fractional shares are particularly useful for investors who may not have enough capital to buy full shares of high-priced stocks, such as those trading for hundreds or thousands of dollars per share. They enable investors to diversify their portfolio more easily by allocating smaller amounts of money across various stocks or exchange-traded funds (ETFs).
Fractional shares have become more popular with the rise of online brokerage platforms and investment apps that offer the feature to their customers. This allows investors to invest in a wide range of assets, even with limited funds, and to participate in the stock market without the barrier of high share prices.
Are Fractional Shares A Good Idea?
We outline several key pros and cons to help investors make informed decisions about incorporating fractional shares into their investment strategies.
Pros | Cons |
|---|---|
Invest With Less Money | Lack of Voting Rights |
Boost Diversification | Limited Liquidity |
Reinvestment of Dividends | Fees |
Partial Ownership |
- Invest With Less Money
Fractional shares allow investors to buy into expensive stocks with limited capital, making investing more accessible to a broader range of people.
- Boost Diversification
Investors can easily diversify their portfolios by spreading their investment across multiple stocks or ETFs, even with small amounts of money.
- Reinvestment of Dividends
Dividends earned on fractional shares can be reinvested automatically, helping to compound returns over time without the need for additional capital.
- Partial Ownership
Fractional shares allow investors to own a portion of high-priced stocks, enabling them to participate in the potential growth of leading companies without purchasing whole shares.
- Lack of Voting Rights
Fractional shareholders may not have voting rights in company matters, as these are typically associated with whole shares, limiting their influence on corporate decisions.
- Limited Liquidity
Selling fractional shares might be trickier than whole shares due to lower trading volume.
- Fees
Per-trade commissions can impact smaller investments more significantly, so compare fees before buying.
Ideal Investor Profiles for Fractional Shares
Fractional shares can be a good fit for several types of investors, including:
Beginner Investors: Those who are new to investing and may have limited capital to start with can benefit from fractional shares. It allows them to build a diversified portfolio with smaller amounts of money.
Small Investors: Investors with limited funds who want to invest in expensive stocks or ETFs can use fractional shares to gain exposure to these assets without needing to buy whole shares.
Dollar-Cost Averaging: Investors who employ dollar-cost averaging strategies can use fractional shares to consistently invest fixed amounts of money at regular intervals, regardless of share prices, thus smoothing out the effects of market volatility.
How To Buy Fractional Shares?
Buying fractional shares is relatively straightforward, and here's how you can do it:
Choose a Brokerage Platform: First, you'll need to open an account with a brokerage platform that supports fractional share trading. Many online brokers and investment apps offer this feature.
Fund Your Account: Deposit funds into your brokerage account. You can transfer money from your bank account or use other funding methods provided by the brokerage.
Research Investments: Decide which stocks or ETFs you want to invest in. Conduct thorough research to understand the companies or funds you're interested in and their potential for growth.
Place an Order: Once you've selected your desired investment, place an order to buy fractional shares. Instead of specifying the number of shares you want to buy, you'll input the dollar amount you want to invest.
Monitor Your Investments: Keep track of your fractional share investments through your brokerage account. You can monitor their performance and make adjustments to your portfolio as needed.
By following these steps, you can easily buy fractional shares and start building a diversified investment portfolio, even with limited capital.
Popular Brokers For Fractional Shares
Here are five popular brokers for fractional shares:
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Fidelity
Fidelity is a trusted name known for its low fees, extensive research tools, and commission-free fractional shares on US stocks & ETFs.
It provides a broad range of investment options, including fractional shares for stocks and ETFs. Through Fidelity's platform or mobile app, investors enjoy flexibility and convenience.
Best For: investors seeking a wide range of investment options
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Charles Schwab
Charles Schwab's Schwab Stock Slices feature allows investors to buy fractions of popular stocks. Offering a wide selection of stocks and ETFs, investors can diversify easily.
Competitive fees and access to global markets make it a solid choice for beginners and experienced investors alike.
Best For: investors looking for a reputable brokerage
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Robinhood
Popular for its mobile-first approach and commission-free trading, including fractional shares on US stocks & ETFs.
There is no account minimum but limited research tools and margin trading restrictions.
Best For: active, app-based investors with smaller portfolios.
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M1 Finance
Specializing in fractional share investing, M1 Finance offers customizable portfolios known as “Pies,” catering to investors' preferences.
With features like automatic rebalancing, no fees on fractional shares and dividend reinvestment, it's ideal for long-term investors.
Best For: long-term investors who prefer a hands-off approach with customizable portfolios
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Acorns
Acorns offers fractional shares through its round-up feature, allowing investors to invest spare change from everyday purchases.
With low minimum investment requirements and automated investing options, it's suitable for beginners and small investors. Acorns charges a monthly subscription fee based on the account tier.
Best For: Beginner investors
Fractional Shares Strategies For Investors
Fractional share investing opens up various techniques for investors to optimize their portfolios and achieve their financial goals. Here are some common fractional share techniques:
Dollar-Cost Averaging (DCA): With fractional shares, investors can use DCA to regularly invest fixed amounts of money into their chosen assets, regardless of share prices. This technique helps smooth out market volatility and can lead to long-term wealth accumulation.
Portfolio Rebalancing: Fractional shares allow for more precise portfolio rebalancing by enabling investors to adjust their asset allocations with smaller increments. This technique helps maintain the desired risk-return profile over time.
Dividend Reinvestment: Investors can reinvest dividends earned from fractional share holdings back into the same stocks or ETFs. This technique can accelerate the growth of the investment by compounding returns over time.
Fractional Share Slicing: Some brokerage platforms offer “slice” features, allowing investors to buy fractional shares of multiple stocks within a single transaction. This technique facilitates diversification by spreading investment across various companies in one go.
Tax-Loss Harvesting: Fractional shares enable investors to engage in tax-loss harvesting by selling fractional shares of underperforming assets to realize losses for tax purposes. This technique can offset capital gains and reduce tax liabilities.
Dynamic Asset Allocation: Investors can dynamically adjust their asset allocations based on market conditions or personal preferences with fractional shares. This technique allows for tactical shifts in the portfolio to capitalize on investment opportunities or manage risks.
By leveraging these fractional share techniques, investors can build diversified portfolios, manage risks, and optimize their investment outcomes according to their financial objectives and preferences.
Fractional Shares Tips
Here are some helpful tips for investing in fractional shares, especially if you're a beginner:
Diversify Your Portfolio: Take advantage of fractional shares to invest in a variety of stocks or ETFs across different sectors and asset classes. Diversification can help reduce risk and enhance long-term returns.
Focus on Quality: When selecting fractional shares, prioritize high-quality companies with strong fundamentals and sustainable competitive advantages. Look for companies with solid growth prospects, reliable revenue streams, and healthy balance sheets.
Reinvest Dividends: Consider reinvesting dividends earned from fractional share holdings to compound your returns over time. Many brokerage platforms offer automatic dividend reinvestment plans (DRIPs) to reinvest dividends into additional fractional shares.
Consider Fees and Expenses: Be mindful of any fees or expenses associated with fractional share investing, such as trading commissions, account maintenance fees, or expense ratios for ETFs. Choose brokerage platforms that offer competitive pricing and transparent fee structures.
Review Platform Features: Explore the features and capabilities of different brokerage platforms offering fractional shares. Look for platforms that provide research tools, educational resources, and investment guidance to support your investment decisions.
FAQs
Fractional shares are appealing for younger investors because they allow them to start investing with small amounts of money, even if they can't afford whole shares of expensive stocks.
This accessibility lowers the barrier to entry into the stock market, empowering young investors to build diversified portfolios and start growing their wealth early on.
Fractional shares play a crucial role in diversification by enabling investors to spread their investment across multiple stocks or ETFs, even with limited funds.
This diversification helps mitigate risk and can enhance long-term returns by reducing the impact of individual stock performance on the overall portfolio.
Robo-advisors contribute to the realm of fractional shares by offering automated investment services that utilize fractional shares to build and manage diversified portfolios.
These platforms use algorithms to allocate investments based on investors' risk tolerance and goals, making fractional share investing accessible and convenient for a wide range of investors.
Tax considerations associated with fractional shares include capital gains taxes when selling shares at a profit and dividend taxes on dividends earned from fractional share holdings.
Additionally, investors need to be mindful of the tax implications of transactions such as tax-loss harvesting and dividend reinvestment, which can impact their overall tax liabilities.
