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How to invest in fractional shares
Find out what fractional shares are and how to trade them.
What are fractional shares?
When you buy shares in a company, you buy a small slice of ownership in that company. A fractional share takes that slice of ownership and cuts it in half to produce fractional shares instead.
Sometimes fractional shares are created accidentally as a result of dividend reinvestment plans, stock splits or mergers. Other times, the splitting is completely intentional and performed by a broker. Not all brokers offer access to fractional shares, but some do, including Betterment, Robinhood and SoFi.
What is a dividend reinvestment plan?
A dividend reinvestment plan is when you give your broker permission to reinvest earned dividends to buy more shares.
Intentional fractional shares
Brokers that offer access to fractional shares give you the opportunity to invest in companies you might otherwise miss out on due to the high cost of entry. With fractional shares, you can invest without having to shell out the full cost of the share.
For example, Microsoft, Apple, Netflix and Disney shares all cost more than $100 each. And Tesla’s stock sits above $1,000 per share. With fractional shares, you can buy a fraction of one Tesla’s or Disney’s share, at a proportionately lower price.
Fractional shares allow investors with limited funds to start investing. One of the best ways to manage risk in a portfolio is to diversify, which is impossible if you only have enough for one share. With fractional shares, you can split funds across sectors and industries to extend the reach and diversity of your portfolio.
Where to buy fractional shares
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:
Compare brokerage accounts
If you’re looking for a new brokerage account, compare your options using the table below.
Dividend reinvestment plans allow you to reinvest your dividend payments into more shares, which slowly increases 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 they combine to make full shares.
Sometimes, companies choose to split their shares in a process called stock splitting. Stock splitting divides existing shares into multiple shares to help increase their liquidity. The split doesn’t actually add any additional value — the total dollar value of the shares stays the same — it just changes the number of available shares, making them more accessible for new investors.
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.
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 much more affordable, demand for the stock spiked.
Reverse stock splits
Reverse stock splits are also possible. This occurs when a company divides 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 together, or 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. Before you open an account, compare brokerages to find the platform that best meets your needs.
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