Fractional shares have made investing in the stock market much easier for the everyday, average investor. Fractional share investing enables you to buy less than a full share of a company. If you only have a small amount of money to invest, that means that you can build a diversified portfolio rather than put it all into buying a single high-priced share.
However, there are some downsides to fractional shares. So, the question becomes, are fractional shares worth it? In this guide, we’ll take a closer look at fractional shares. We’ll talk about what fractional shares are and cover the pros and cons of investing in these types of shares. We’ll also highlight some of the best platforms for fractional share investing so you can be successful.
Let’s get started!
What is a Fractional Share?
A fractional share is a portion of a single stock share of a company. Say you invest $20 into a company with a share price of $100. In that case, you would own 1/5th of a share – that’s fractional share investing.
Fractional shares can come in handy for stocks that cost thousands of dollars apiece. Take Amazon stock, for example, which trades for around $3,500 per share. Without fractional share investing, you would have to invest $3,500 for a single share. If you wanted to invest more, you have to purchase in $3,500 increments – so $7,000 for 2 shares or $10,500 for 3.
Fractional share investing enables you to invest in companies according to the dollar amount you want to purchase. So, you can decide how much to invest in any given stock based on how you want to allocate money in your portfolio, without worrying about share prices.
Pros and Cons of Fractional Shares
Fractional share investing has generally been a positive development for investors, and especially investors who only have a small amount of money to invest. However, there are some drawbacks to fractional share investing to keep in mind. Let’s take a look at the pros and cons of fractional shares.
- Start investing with a small amount of money: Many fractional share platforms let you invest from as little as $5.
- Invest in companies with high stock prices: You can invest in companies with stock prices in the thousands of dollars, while buying as much or as little as you want.
- Easily allocate your portfolio: You can add stocks to your portfolio based on dollar amounts, not share prices. So, if you want to buy 10 stocks and have $5,000 to invest, you can simply purchase $500 of each.
- Take advantage of dollar cost averaging: Buy fractional shares of the same company repeatedly over time instead of buying a whole share all at once. Your cost basis will then be the average of all the ups and downs in the share price during the period in which you were buying.
- Fractional shares aren’t always transferable: If you change brokers, you may not be able to transfer your fractional shares. You’ll need to sell them, which can trigger fees or have tax consequences.
- You could miss out on dividends: If you own a small fraction of a dividend share, there’s a chance your dividend payout will be less than $0.01. When that happens, most brokers will simply pocket your dividend rather than pass it on to you.
- Not all stocks are available as fractional shares: The range of stocks that are available to buy as fractional shares varies from broker to broker. Keep in mind that your investment options may be more limited with fractional share investing.
Top Services for Investing in Fractional Shares
Fractional share investing has taken off in recent years and many of the biggest stock brokers now support it. We’ll highlight some of the top platforms for buying and selling fractional shares.
M1 Finance is a unique fractional share investing service that lets you purchase what it calls “pies.” Pies are essentially miniature portfolios that you can design from scratch. Just decide what fraction of the pie each holding should make up and how much you want to invest in the whole pie, and M1 Finance will allocate your money appropriately.
Even better, M1 Finance offers more than 100 expert-curated pies that you can invest in with as little as $1 per holding. The broker also has thematic pies that enable you to invest in fractional shares of Black-led, women-led, and LGTBQ-led companies.
Of course, you can also buy fractional shares of individual companies with M1 Finance. Fractional shares are available for most US stocks and ETFs and require a minimum investment of just $1.Click Here To Get Started
Robinhood takes a more traditional approach to fractional shares than M1 Finance. The company lets you invest in fractional shares of almost any US stock or ETF with as little as $1.Get A Free Stock When You Open An Account
Fidelity offers fractional share investing for more than 7,000 US stocks and ETFs. You’ll need to invest at least $1 and there are no trading commissions.Click Here To Get Started
Charles Schwab supports fractional share investing only for S&P 500 stocks and you must invest at least $5 at a time. What makes Schwab unique, though, is that you can purchase up to 30 different fractional shares simultaneously. So, it’s possible to create a diversified portfolio in a single trade.Click Here To Get Started
Betterment is a robo-advisor that puts together a custom portfolio of ETFs based on your investment goals and risk tolerance. There’s no minimum balance, and Betterment will automatically invest your funds in fractional ETF shares as you contribute towards your portfolio.Click Here To Get Started
Conclusion: Investing in Fractional Shares
Fractional share investing has made stock investing more accessible, particularly for investors with small portfolios. While there are some downsides to fractional shares, they make it easier to put together a balanced portfolio and enable you to invest in companies without worrying about the share price. There are many services that enable you to invest in fractional shares, many from just $1.