Let’s talk about fractional shares…
- Fractional share investing lets you buy just a piece of a company’s stock, thereby bringing high-priced securities into reach for the average retail investor.
- Investing in fractional shares confers the same perks of stock ownership, including dividend payouts and voting rights. Moreover, it provides a way to diversify your portfolio and leverage dollar-cost averaging to your advantage.
- However, fractional investing can come with some disadvantages, such as increased fees, fewer transfer options, and liquidity concerns.
In the post-pandemic era, it’s not uncommon to see popular stocks with high price tags – Amazon alone traded for over $3,000 in 2021. But that’s a high bar to clear for most retail investors, the bulk of whom have monthly investing budgets well below that threshold. So, what’s a poor investor to do if you want to get in on the priciest securities before their next big move?
Well, that’s what fractional shares are for.
What are Fractional Shares?
Fractional shares are just what they sound like: fractions of a single share of a company’s or ETF’s stock. Many modern brokerages – particularly robo-advisors – encourage fractional share investing. They do this one of two ways: by allowing investors to purchase either a set dollar amount or a set percentage of a share of stock.
But before robo-advisors came along, investors were typically limited to whole-share investing. The exceptions were mutual funds, many of which allowed fractional investing, as well as scenarios such as stock splits, company mergers, and dividend reinvestment plans (DRIPs).
But now, even the big-name brokers are in on the game, providing access to investing for anyone with five bucks and a dream to one day retire comfortably.
How Do Fractional Shares Work?
Let’s say that you’re interested in owning stock in NotAmazon, which currently has a per-share price of $500. That’s a little steep for your budget, but you can afford $100. So, you pull up your investment account and initiate a trade for $100 – and voila! You now own 1/5 of one share of NotAmazon.
Once you own your fractional share, your position is treated the same as any other investor. You make the same percentage gains and typically receive the same benefits of stock ownership.
For instance, if a stock undergoes a split, you’ll receive the relevant number of fractional shares. And if the company pays out a dividend, you’ll receive returns proportional to the percentage of shares that you own.
Many companies, such as Robinhood, also confer voting rights to fractional shareholders by aggregating and reporting collective votes. (Though not all brokers offer this right.)
Why Invest in Fractional Shares?
One of the biggest benefits of investing in fractional shares is the ability to buy into positions you couldn’t otherwise afford. While shelling out thousands of dollars for one share is a steep ask for many retail investors, $100 is often far more doable.
Another reason to consider fractional investing is the potential for greater diversification. Take Amazon as an example again. Why would you disproportionately weight the bulk of your portfolio toward one company when you could split that $3,000 among 30 other securities? After all, a well-diversified portfolio is often hailed as the key to success.
Moreover, if you leverage fractional share investing properly, you may even have a better chance of outperforming the market. This is possible through dollar-cost averaging, where you allocate a set amount of funds toward your investments at regular intervals, regardless of the per-share cost. Instead of just buying the dips, you invest consistently and avoid the hassle – and potential losses – of trying to time the market.
Over time, dollar-cost average often proves to be one of the most profitable investment strategies in a well-diversified portfolio. And with fractional share investments, you don’t have to worry about your brokerage holding your funds in cash until you can afford a single share. Instead, you can get invested immediately and reap greater long-term benefits.
And lastly, fractional shares provide investors with smaller pocketbooks access to bigger, more stable companies. While the growth prospects may not match those of many cheaper investments, long-term stability can be crucial for investors who can’t afford increased portfolio volatility. With fractional investing, no company is out of reach for anyone.
The Downside of Fractional Shares
Of course, fractional share investing has its downsides and risks, too. Some of the most pertinent include:
- Smaller selection. Not every broker or company offers fractional share investing, thereby limiting your prospects from the outset.
- Liquidity concerns. Depending on the security, fractional shares may be less liquid than their whole-share counterparts. Two factors contribute to decreased liquidity: a lack of security demand, and brokers who wait to accumulate enough fractional orders to buy a whole share before they initiate a trade.
- Low costs can lead to decreased due diligence. Some investors look at fractional investing as a way to break into the market quickly – which means they may not do the research required to make fully-informed purchases. And if you’re buying fractional shares of individual stocks instead of mutual funds or exchange-traded funds, you’re inherently adopting a riskier position.
- Increased fees. Some platforms offer fractional share trades for free. But that’s not always true – and if your broker charges per trade, investing in tons of fractional shares can cost more than you’ll reasonably gain in the near future.
- Fewer transfer options. Most brokers don’t allow fractional share transfers. As such, if you want to move your position to another brokerage, you’ll have to cash in your position and reinvest elsewhere, which may cost you in taxes or fees.
How to Invest in Fractional Shares
If you’re ready to buy your first fractional share, a great place to look is an online brokerage. Typically, such brokers let investors get started with as little as $1 ro $5.
However, it’s not just industry disruptors like Robinhood and SoFi who command the space anymore. Big names like Charles Schwab and Fidelity have also dived into the fractional pool. Though they often offer more limited opportunities. And of course, a variety of investing apps and websites offer fractional investing, too, such as Acorns, Betterment, and Stash.
And our own artificial intelligence platform, Q.ai, also provides a way to break into fractional investing. But unlike the other guys, you’re not responsible for selecting your own securities and doing hours of research. Instead, all you have to do is fund your account, select a themed investment kit that suits your risk tolerance and investment goals, and note the percentage of funds you’d like each strategy to receive.
Then, hand the reigns over to our deep-learning algorithms to do the rest – with no hassle for you.
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