Fractional share investing lets investors buy less than a full share at one time. This can be helpful when share prices are too high for an investor to be able to afford. It also makes it easier for investors to invest very precise amounts in a company. However, fractional share investing has some drawbacks.
How Do Fractional Shares Work?
Buying fractional shares in a company works much like buying whole shares in the business. You choose a business that you want to invest in and the amount of money you want to invest. If the amount that you want to invest isn’t enough to buy a full share, you’ll purchase a portion of a share instead. For example, assume company XYZ has a share price of $50. If you have $25 to invest, you can buy half a share. If you have $75 to invest, you can buy a share and a half. These examples assume no commissions or other fees. Another popular way to buy fractional shares is through a dividend reinvestment plan (DRIP). With a DRIP, you use dividends to buy more shares in the company paying the dividend. As you accumulate more shares, the amount you receive in dividend payments tends to increase. Fractional share investing is only available from certain brokerages. If your broker does not support fractional share investing, you can only buy whole shares. Someone with $25 could not buy any shares in XYZ and someone with $75 could only buy a single share. Each broker handles fractional shares slightly differently. For example, Schwab only allows fractional share investing for companies in the S&P 500. Robinhood won’t let you transfer fractional shares out of your account. Some brokers won’t let you trade fractional shares in real-time. They’ll group your orders with other orders or limit when you can trade them, which can affect those shares’ liquidity.
How to Invest in Fractional Shares
If you want to invest in fractional shares, the first thing you need to do is open a brokerage account with a brokerage that offers fractional share investing. Some of the top options include Schwab, M1 Finance, Fidelity, and InteractiveBrokers. Once you’ve opened an account, you can start investing. Usually, when you invest in a stock or ETF, you have to choose the security to buy and the number of shares to purchase. With fractional shares, you can instead specify the amount of money to invest. The broker will use the money you want to invest to buy whole shares until you can’t afford a whole share, then use the remaining funds to buy a fractional share and add it to your account.
Pros and Cons of Fractional Share Investing
Pros Explained
Invest in companies with high share prices with any amount of money: If you want to invest in a company with a high stock price, you don’t need to save up until you have enough money to buy a whole share. You can start with a smaller amount of money. Invest precise amounts of money in a stock or ETF: Without fractional share investing, you can only invest in increments equal to the share price of a stock or ETF. Fractional shares let you invest exactly the amount you want to invest without worrying about buying whole shares. It is easier to reach your desired asset allocation: If you can only buy in increments of whole shares, it can be hard to split your asset allocation precisely between different businesses. With fractional shares, you can allocate your money between different companies however you’d like.
Cons Explained
Different brokers have different rules for fractional share investing: You’ll want to make sure you understand how your broker handles fractional share investing, such as how it pays dividends or handles voting rights and buy and sell orders.If your broker charges commissions, you could incur more fees: With fractional share investing, it can be easier to make more trades as you don’t need to wait until you can afford a full share. This can make it easier to incur more commissions if your broker charges a fee with each transaction you make.
Should You Choose Fractional Shares?
Fractional shares have several benefits and relatively few drawbacks. If you choose a brokerage that doesn’t charge additional fees for fractional share investing or charge commissions for trades, the option to trade fractional shares simply gives you more freedom to invest the amount you want instead of having to invest only in whole share increments.
Unless you’re day trading, things like how the broker groups orders and whether it lets you trade in real-time likely won’t have a major impact on your investment performance. The Balance does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future performance. Investing involves risk, including the possible loss of principal.
