Fractional shares lower the barrier to entry for high-dollar stocks to help you diversify your investments — but not all brokers offer them and they may encourage impulse trading.
Fractional shares are slices of whole shares. Through fractional share investing, traders can buy top-shelf blue-chip stocks they might not otherwise be able to afford.
Take Amazon, for example. Amazon’s stock traded above $3,000 for the latter half of 2020. Investors interested in adding AMZN to their portfolio would need to shell out an exorbitant $3,000 for a single share. Fractional investing allows you to invest smaller sums for a slice of stock. Instead of paying $3,000 for an Amazon share, you could pay $30 for a fractional share.
Fractional shares can be created as a result of stock splits, company mergers and dividend reinvestment plans. Not all brokers offer access to fractional shares, but some that do include Fidelity, SoFi and Robinhood.
Are fractional shares worth it?
Fractional shares are an opportunity for investors to diversify their portfolios with pieces of high-priced stock. Buying whole shares of high-interest companies like Amazon and Tesla can be prohibitively expensive for some investors. Fractional shares open the door for you to invest in the stocks you want to add to your portfolio regardless of their price tag.
To invest, you’ll need to open a brokerage account with a platform that offers access to fractional shares. Not all brokers offer fractional share investing, but some do.
You can buy fractional shares from a self-directed brokerage account or through a robo-advisor.
Self-directed brokerage accounts that offer fractional shares include:
Robo-advisors that offer fractional shares:
Once you’ve opened and funded your account, you can invest in fractional shares by following these steps:
- Search for the stock. Pinpoint the stock by searching by company name or ticker symbol.
- Enter your investment amount. Instead of indicating how many shares you’d like to purchase, enter the amount you’d like to invest.
- Submit your order. Review your order details and submit your order to complete the transaction.
- Track your investment. Log in to your account to review your portfolio and track the performance of your investments.
If you’re looking for a new brokerage account, compare your options using the table below.
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Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.
Pros and cons
- No barrier to entry. Nab slices of stock from your favorite companies, regardless of their price tag.
- Diversification. Instead of allocating funds to a single high-dollar share, you can purchase fractional shares to spread your funds across multiple stocks.
- Impulse investing. Low-cost investing can occasionally lead to impulsive trading habits.
- Account transfers. It’s often challenging to transfer fractional shares between brokers, so you may need to sell your fractional shares before you can move funds.
Penny stocks versus fractional shares
Both penny stocks and fractional shares can cater to the low-dollar investor, but that’s where their similarities end.
Penny stocks cost less than $5 per share. They come from new and untested companies and typically don’t sell on major exchanges: You have to buy them over-the-counter (OTC). They offer the opportunity for growth, but they’re also volatile and illiquid.
Fractional shares come from tried and tested companies and can range in price depending on how much you’re willing to spend — and how much the stock costs to begin with. These stocks are typically of a much higher quality than penny stocks because they come from well-established companies with a proven track record.
And speaking of which: fractional shares pay dividends. The dividends are split based on the portion of the share that you own, so if the dividend payout is $1 per share, then 50% of a share will get you $0.50. It’s also worth noting that if you’re due less than a penny in dividends, you’re unlikely to see it hit your account.
The creation of fractional shares can be intentional or unintentional. Some shareholders specifically seek fractional shares as part of their investment strategy. Others find themselves holding fractional shares as a byproduct of a company acquisition or dividend reinvestment plan.
Fractional shares are created when investors place an order for a partial slice of stock. Not all brokers offer fractional share investing, and the ones that do may only offer a limited selection of stocks.
Dividend reinvestment plans allow you to reinvest your dividend payments into more shares, which slowly increase your equity. If you don’t receive enough in dividends to purchase a full share, you’ll get a fractional share. Continue to collect these fractional shares and eventually you’ll have enough to constitute a full share.
Companies perform stock splits by dividing existing shares to increase their liquidity. The split doesn’t actually add any additional value — the total dollar value of the shares stays the same. The split simply increases the number of available shares, making them more accessible for new investors.
Take Apple’s 2014 stock split, for example. It issued a split of 7-for-1, which meant that for every share a shareholder held, they had 7 following the stock split. This lowered the share price from $650 per share to just over $90 per share. With Apple’s stock suddenly becoming more affordable, demand for the stock spiked.
If you hold one share of a company and it decides to split its stock, you may find your single share has been split into two, three or more shares, with the potential fractional share thrown into the mix, depending on how shares were split. Most companies that engage in stock splitting use 2-for-1 or 3-for-1 ratios to divide shares, but other ratios are also possible.
Reverse stock splits
Reverse stock splits are also possible. This occurs when a company combines the number of shares its stockholders own. The number of available shares is reduced and the price per share increases.
Companies typically do this to meet minimum stock price requirements for stock exchanges. If you hold one share of a company and the company performs a reverse stock split, you’re left with a fractional share.
Mergers and acquisitions
When two companies merge — or when one company acquires another — fractional shares may be inadvertently created. This is because an attempt is made to ensure that one share in one company is equal to one share in the other. This can result in stock splits or reverse stock splits.
Fractional shares can be a practical way for new investors to diversify their investments with a relatively small portfolio. To invest in fractional shares, you’ll need a brokerage account. Compare your platform options by research features, fees and available securities to find the account best suited to your needs.