When I started watching the stock market over 25 years ago it cost thousands of dollars to start investing in stocks. However, the internet and computers have allowed many people to embark on investment journeys to earn extra or passive income over time with a small amount of money to start due to fractional share investing. Buying fractional shares has become quite popular for many individuals. But, what are fractional shares?
Fractional shares are portions of equity stocks, equating to less than one whole share. Fractional shares are generally created by stock splits, dividend reinvestment plans (DRIPs), or comparable corporate actions such as mergers and acquisitions.
In other words, fractional shares are simply portions of a whole share of stock. Every investor owns a fraction of the total shares outstanding. You purchase fractional shares through a process called dollar-based investing. Most brokerages offer commission-free trading, which means you don’t pay transaction fees associated with the purchase or sale of your partial shares.
You buy fractional shares through a process called dollar-based investing. Most brokerages offer commission-free trading, which means you don’t pay transaction fees associated with the purchase or sale of your partial shares. In the days of physical shares, it was impossible to ‘split” a share. This is because brokers have done away with the formality of whole-numbered shares, and investors can now buy fractions of shares.
In the days of physical shares, it was impossible to ‘split” a share. This is because brokers have done away with the formality of whole-numbered shares, and investors can now buy fractions of shares.
Although fractional shares can be a great way to get your foot in the door, it does involve some aspects that make it quite different from owning whole shares.
How do fractional shares work?
Fractional shares work the same way as regular stock shares and you have largely the same benefits. The major difference is that fractional shares do not have voting rights. Investors get to participate in the gains and also receive dividends.
A fractional share is ideal for people that want to invest, but have a small amount of money. This allows them to buy a percentage of a share and allows for more diversification of your portfolio. Most brokerages allow for fractional share investing.
Why Use Fractional Shares?
Investing fractional shares of stock is not considered the best way to invest and receive a return on investment (ROI). But, they are excellent for those who are unwilling to buy an entire stock, saving investors thousands of dollars, making shares accessible to a wider range of potential investors.
Investing With a Lower Budget
Fractional shares allow individuals to invest in the market irrespective of their budget, as many companies are selling fractional stock share ranging from low to medium prices. People can use smaller amounts of cash and still gain some benefits from growth in the market, especially if they hold for a long-term return on investment.
Build A Diversified Portfolio
While fractional shares are more budget-friendly, financial availabilities are not always the motive for using them. Even those who can purchase a complete stock share may choose to use fractional shares, prioritizing flexibility and diversity. Diversifying reduces risk exposure and helps maximize the potential return on investments over time.
Fractional Share Investing
Since fractional shares cannot be bought in traditional ways, it is slightly more complex than using full stock shares. However, many brokerage firms allow the trade of fractional shares. You will need to start by identifying a trustworthy brokerage firm that deals in fractional shares.
Buy Fractional Shares
Plenty of online brokerage platforms allow one to purchase fractional shares from them, such as Robinhood, Charles Schwab, and Fidelity. A few investing apps offer fractional shares for potential investors, including Cash App, SoFi, and Stash. Some Robo-advisers can purchase fractional shares as well, such as M1 Finance.
There are generally varying limitations to buying shares, as varying firms have curated lists of available fractional shares from different companies. Some brokerage firms may have minimal amounts ranging from $1 – $5 and charge additional fees or commission of varying prices. These factors should also be considered when choosing a brokerage firm.
Sell Fractional Shares
The only way that one could sell their fractional shares would be through a major brokerage or with some financial institutions. When trading shares through a major brokerage firm, they would join fractional shares until they could make one whole share.
Some great brokerage firms include M1 Finance, Betterment, Stash, and Stockpile for buying and selling fractional shares. These firms have various benefits for investors dealing in fractional shares, allowing plenty of potential return on investment and diversified portfolios.
Is There a Downside to Fractional Shares?
Fractional shares may be great for those who cannot purchase a full share, but they do come with a few downfalls in the long run. The biggest issue really is that you can’t sell covered calls with fractional shares.
In addition, any fractional shares may have to be sold so you can transfer the resulting cash. This could come with tax implications, fees or other unforeseen costs. Don’t let them distract from proven principles, like investing for the long term.
When it’s easier to buy into the stock market, it’s more tempting to take a hands-on approach to the market, he says. But actively buying and selling stocks is rarely a better strategy than buying and holding for the long term.
Trading Fractional Shares and Liquidity
Generally speaking, fractional shares cannot be traded on the open market as whole shares can. While trading is still possible, the necessary process can be complex or problematic compared to simply trading on the open market.
The process limits the number of trades made and can take time, which is a massive influence in the trading field and would take even longer if the selling stock is not in high demand. Additionally, many brokers will not let you transfer your shares to other firms, opting to give your cashback instead.
In addition to the lengthened trading process, investors may have to incur additional fees, especially with smaller amounts. The costs differ depending on the firm, as some may not require a commission. But, brokerage firms typically charge commission for trades, some of which can be quite high. This can have a drastic impact on the expected return of investment over time.
Availability of Shares
Another issue surrounding fractional shares is how to attain them. While they are formed through many common corporate processes and actions, they are not easy to find on a broad scale. Many companies do not offer fractional shares, only allowing investors to buy one full share or more.
In many cases, using a broker to handle fractional shares can result in shareholder rights being revoked. When owning less than a full share, you may not be able to exercise voting rights on company happenings, depending on the brokerage firm. Some firms add up to a share to allow voting, while others require at least one purchased share to vote.
Do I get Dividends on Fractional Shares?
Yes, investors will get dividends on fractional shares concerning the value of a fractional share compared to a full share. Similar to how fractional shares equate to a portion of a whole share, the dividends on fractional shares reflect the portion of the stock’s dividends.
This means that an individual owning a full share may get a dividend payout of $0.50. At the same time, an individual owning a fractional share equal to half of a full share would receive $0.25.
Fractional shares can be a fantastic way to invest in the market for lower starting costs or diversification. But, there are plenty of complexities to consider, and fractional shares are not always available for purchase on a broad scale. It’s always best to consult a financial advisor or skilled professional who can assist in creating a long-term investment plan to grow your assets.
Do fractional shares add up to whole shares?
The short answer is that fractional shares can add up to whole shares. Many brokerages offer investment plans that allow for monthly reinvestment plans that systematically purchase fractional shares. Over time, these fractional shares add up to full shares.