Imagine having the ability to own a slice of your favorite tech giant or a piece of a renowned company’s success, all without breaking the bank. Welcome to trading fractional shares, a financial innovation that’s democratizing access to the stock market, and making once-unattainable investments accessible to all.
This guide explains how fractional shares work, including their advantages and disadvantages. We also explain how to buy fractional shares and share our pick of the best brokers for fractional stock trading.
- Trading fractional shares allows you to purchase a portion of a share, making it more affordable if you don’t have the capital to buy whole shares.
- You can diversify your portfolio by owning fractions of multiple stocks, spreading risk and potentially improving your performance.
- Fractional stocks can be purchased in various amounts, making it easy to invest small or large sums of money and adjust portfolio holdings.
- Fractional shares can still receive dividends, and the payout is proportionate to the fraction of the share owned.
Best Brokers For Fractional Shares
We recommend the 3 brokers below for trading fractional shares. They offer a wide range of fractional stocks with low to zero commissions.
Understanding Fractional Shares
Traditionally, investing in stocks required purchasing whole shares of a company, which posed a significant hurdle for individuals with limited capital.
Mutual funds emerged as a solution in the early 20th century, allowing investors to pool their funds and access diversified portfolios. However, mutual funds limited individual stock selection and control.
The digitalization of trading in the late 20th century marked a significant turning point. Online brokers made it easier for individuals to participate in financial markets, yet the practice of trading in whole shares persisted.
Fractional share trading came into prominence in the 21st century, particularly with the rise of fintech companies and innovative brokerage platforms. These platforms introduced the concept of buying and owning fractions of shares, thus expanding investment opportunities.
This democratizing approach has empowered retail investors, making it more affordable to invest in high-priced stocks and fostering portfolio diversification.
Fractional share trading has even extended beyond traditional stocks to encompass ETFs, cryptocurrencies, and a range of other asset classes, demonstrating its growing relevance in today’s financial landscape.
Fractional Shares Vs Full Shares
The main difference between fractional shares and full shares lies in the quantity of ownership in a company or asset.
Fractional shares represent a portion of a single share. You can buy and own fractions of shares, which can be less (or more) than a whole share. This enables you to invest in companies or assets with limited capital, as you are not required to purchase entire shares.
In other words, instead of indicating the number of shares you wish to purchase, you have the option to determine the amount of money you want to invest in a specific company. If your available cash doesn’t cover the cost of a whole share, you can still acquire a fractional portion of that share.
For example, you can own half a share of a company if you invest in a fractional share.
Fractional shares are particularly beneficial if you have limited capital and still wish to invest in companies with higher-priced shares.
Full shares, on the other hand, represent complete ownership of a single share of a company or asset. When you buy a full share, you own the entire unit of that particular security. It requires the investment of the full share price to become a shareholder in the company.
Suppose you’re interested in investing in the technology company Microsoft, but the current price of one whole share is $300, which is more than you want to spend. However, you have $100 that you’re willing to invest.
Instead of buying a whole share, you enter the amount you want to invest, which is $100. Your brokerage platform calculates that you can purchase 33% of a share (0.33 of a whole share) with your $100. You confirm the order, and the brokerage executes the trade.
After the trade is complete, you own 0.33 shares of Microsoft. Your fractional share still entitles you to a portion of any dividends paid by the company, and your investment will gain or lose value in proportion to the movements of the stock’s price.
This example demonstrates how fractional stock trading enable you to invest in a company like Microsoft without needing to buy a whole share, making it more accessible and cost-effective.
Pros & Cons Of Fractional Shares
- Fractional shares make it possible to invest in high-priced stocks or assets that may have otherwise been out of reach.
- Fractional stock trading offers a cost-effective way to invest, as you can allocate your available funds more efficiently, without the need to purchase entire shares.
- Fractional shares allow for flexible investing, enabling you to incrementally increase your investment over time. This flexibility caters to various budget sizes and allows for gradual wealth accumulation through consistent investments.
- Fractional share ownership grants you a proportional stake in a company’s ownership and entitles you to a share of dividends and potential capital gains, just like owning full shares.
- You can customize your portfolio by investing precise amounts in specific stocks, creating a personalized investment strategy that aligns with your financial goals and risk tolerance.
- Investing in fractional shares often means you have limited or no voting rights in company decisions, as these rights are typically associated with whole share ownership. So, you may not have a say in corporate governance matters.
- Some companies may not pay dividends on fractional shares, which can reduce your income potential, especially in the case of dividend-focused strategies.
- The market for fractional stocks can be less liquid than that of whole shares, potentially making it more challenging to buy or sell fractional shares at desired prices, especially for less popular stocks.
- Managing a portfolio of fractional shares can be more complex than holding whole shares, with multiple fractional positions in various stocks to track and manage.
- Due to the small size of fractional positions, returns on investment may be modest, which can be a drawback if you are seeking substantial gains. Gains and losses are proportional to the fraction of shares owned.
How To Buy Fractional Shares
Fractional shares are obtained through a method known as dollar-based investing. In this approach, you designate the amount of money you intend to invest in a specific company, such as $20, and purchase as many shares as your investment amount permits.
Many brokerages that provide fractional shares also offer commission-free trading, meaning you won’t be charged transaction fees when buying or selling your shares.
The absence of commissions makes fractional investing more cost-effective, as paying a commission for such small transactions might require a substantial rate of return on your fractional share to offset the trading expenses.
Buying fractional shares is a straightforward process that can be done through most online brokerage platforms. Here’s a step-by-step guide:
1. Choose A Brokerage Account
Start by opening a brokerage account with a reputable broker that offers fractional stock trading. For our recommendations, see our list of the top brokers for fractional stock trading.
2. Fund Your Account
Deposit funds into your brokerage account. You can transfer money from your bank account or use existing funds in your brokerage account.
3. Research & Select Stocks
Research and identify the stocks or assets you want to purchase as fractional shares. Review the stock’s performance, financials, and any other relevant information.
4. Place An Order
Log in to your brokerage account and access the trading platform. Locate the stock or asset you wish to buy fractional shares of. You can typically do this by searching for the stock’s ticker symbol or name.
5. Specify The Investment Amount
Instead of indicating the number of shares you want to purchase, choose the option to invest a specific dollar amount. For example, if you want to invest $100 in a particular stock, enter this amount.
6. Review & Confirm
Review your order details, including the investment amount, and make any necessary adjustments. Once you’re satisfied, confirm the order.
7. Execute The Trade
After confirming the order, execute the trade. Your brokerage will process the transaction, and you’ll own a fraction of the chosen stock based on the amount you specified.
8. Track & Manage
Monitor your fractional share investments in your portfolio. Keep track of their performance and make adjustments as needed. You can buy more fractional shares or sell them as you see fit.
9. Dividends & Voting Rights
Be aware that owning fractional stocks means you may have limited voting rights and may not be eligible for dividends, depending on the policies of the specific company and the brokerage.
Investing in fractional shares lets you purchase portions of high-priced stocks or assets with smaller amounts of capital, providing greater accessibility and diversification.
But it doesn’t eliminate risk. Make sure the affordability of entry doesn’t lead you to conduct inadequate research and potentially make less informed decisions.
What Are Fractional Shares?
A fractional share represents ownership of less than a complete share of a company. Investing in fractional shares is based on a dollar amount, enabling you to hold a portion of a share, one whole share, or even multiple shares in a stock.
Are Fractional Shares Safe?
Fractional shares themselves can be considered safe for investment, and they offer several benefits such as increased accessibility and portfolio diversification. However, as with any investment, there are factors to consider including brokerage safety, liquidity, and voting rights. It is also important not to risk more than you’re willing to lose.
Do Fractional Shares Pay Dividends?
Yes, fractional shares can receive dividends, and the dividend payout is proportionate to the fraction of the share owned. The specific procedures for handling fractional share dividends may vary by brokerage or platform, so we recommend reviewing their individual policies.
Are Fractional Shares Available Worldwide?
Fractional shares are becoming increasingly available worldwide, but their availability can vary depending on the country and the brokerage or investment platform you use. Availability can also be influenced by regulatory and market factors.
Do You Pay Taxes On Fractional Shares?
Yes, you may be subject to taxes on fractional shares. The tax treatment of fractional stocks is generally similar to that of whole shares.
Are Fractional Shares Legal?
Although some regulators, including in India, do not allow fractional stock trading, it is accepted and legal across large parts of the world. US and UK-based investors can invest in fractional stocks, for example.
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