Investing became a topic of interest for many during the pandemic, with the Gamestop and Robinhood saga making headlines earlier this year. However, for many, playing their odds with the stock market can be expensive, with top-performing company shares costing hundreds to thousands each.
Fractional investing might not be as glamorous as buying full shares outright, but it can help you get started with investing sooner, use all of the money you have available for investing, and diversify your portfolio more easily.
What is fractional investing?
Traditionally, when you invest, you purchase a share in a company. For many, this can be quite expensive, leading them to purchase very few shares and earn very little money (if any). With fractional investing, you can purchase portions of a share, allowing you to purchase portions of many top-performing companies at a lower price, while still cashing in on company profits.
With fractional investing, you can begin investing sooner, with less money, rather than waiting and losing possible returns. It also means that if you have $200 to invest and the shares in the company you’re interested in are $155, you can invest the full $200 and own a full and fractional share right away, rather than investing less and waiting.
How to buy fractional shares
Before you can get started with fractional investing, you’ll have to first open a brokerage account with a company that allows fractional shares. The good news is many online brokers platforms offer fractional share purchases, including Fidelity, Charles Schwab, Betterment, Robinhood, Stockpile, and Motif.
You can also opt for an index fund such as the S&P 500 ETF, which can offer more diversification than traditional stock investing. This is a fund that offers fractional shares in the top-performing companies on the S&P, allowing you to spread your money across some of the country’s top companies.
ETFs (exchange-traded funds) may also offer dividends quarterly, which are your share of the companies’ profits each quarter. If you’re interested in an ETF that tracks the S&P 500, Vanguard and Fidelity both offer options with fractional shares. ETFs are generally considered safer, more long-term investment strategies than investing strictly in individual stocks. This is because the risk is spread across different companies, minimizing your chance of loss, but also reducing the returns you could receive by choosing a winning stock.
Pros and cons of fractional investing
Earn returns sooner. Since fractional investing allows you to invest what you have, rather than waiting to buy a certain number of shares, you can begin investing your money sooner and potentially see returns faster.
Makes investing more achievable. For many, investing may seem out of reach due to high stock prices. However, fractional investing allows you to start where you are and begin pooling your money together over time to grow your portfolio.
Can offer dividend reinvestment options. When you earn dividends through an index fund or ETF, you often have the option of reinvesting the money earned automatically. This is made even better with fractional shares, allowing you to revinest all of the money earned, rather than just a portion of it.
Potentially smaller returns. Of course, if you can’t afford to buy a whole share of stock, then even if it performs well, you’ll be limiting the returns you could have earned. While owning a fraction of a share only offers fractional returns, they still allow you to invest sooner, which can earn you more money than waiting to save up enough for a full share. You should weigh the benefits and drawbacks when considering which path is right for you.
Your shares may not be fully transferable. If you decide to transfer your investing services to a new broker or platform, you typically cannot transfer fractional shares — even if the new service allows fractional investing. It’s important to research your broker beforehand when investing with fractional shares to ensure you’re making a good long-term decision for your financial future.
Can place too much focus on short-term earnings. Playing the stock market is risky and while fractional investing allows you to dip your toe in the investing game, in general, it’s usually smarter to play a long-term game. Fractional shares of stocks make it easy for everyday people to buy, share, and trade stocks and could lose a lot of money long-term if they’re only focusing on short-term wins.
Fractional investing FAQs
How do stock splits impact fractional shares?
A stock split happens when a company reduces its share prices, thus increasing the number of shares you own. For instance, if you own 2.5 shares of a company that reduces its stock prices to half-price, you’ll then own 5 full shares in the company. Ultimately, stock splits do not impact fractional shares any differently than full shares.
Is fractional investing less risky?
The type of investment strategy you follow will help set your risk level. For instance, if you choose to use fractional investing to buy and share stocks directly, your risk level will be higher. However, if you invest in ETFs and use fractional investing to revinest your dividend payout, your risk will be lower (depending on the ETF) because your risk is spread across more stocks. Fractional investing simply lets you invest sooner, but how you choose to invest is up to you.
Do brokers set their own rules for fractional shares?
Yes, each brokerage account and platform has its own policies for dealing with fractional shares. Some platforms, like Fidelity, allow you to purchase fractional shares on any stock available, but others might limit the stocks you can fractionally invest in. You should also review any fees associated with fractional shares, though most brokers offering this service do so for free.
Is it worth it to buy fractional shares?
That depends. If you’re waiting to invest until you can afford a stock, then fractional investing can help you get started now, potentially increasing your returns by starting sooner. It can also help you build a well-balanced portfolio through index funds and ETFs. Still, it’s important to research any index fund, ETF, or stock before investing in it — even if you’re focusing on fractional investing.
Are fractional shares hard to sell?
Fractional shares are only available through specific brokers and as a result, they can be more difficult to sell than full shares. That doesn’t mean it’s impossible — just expect it to take more time or only sell when you have full shares available.
The bottom line
Building a diversified portfolio can help set you up for future success — particularly after you retire. Before you consider fractional investing, I always recommend first investing in a workplace or personal retirement fund (401k, Traditional IRA, or Roth IRA) and building an emergency fund. From there, you can focus on investing — whether that means dropping money into an index fund or ETF or trying your luck with the stock market.
If you find stock prices are preventing you from investing, then finding a platform that offers fractional investing could be worth considering.
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