What Are Fractional Shares?

In southern New Jersey, a battle heats up every summer on the boardwalk in Wildwood. It’s not a battle over politics or sports but something far more relatable and crucial to everyday life — pizza. The battle is Sam’s vs Mack’s and everyone has an opinion over which is better.

The big selling point for both shops is that you can buy a single slice while walking down the boardwalk and then continue on your way. Now imagine you couldn’t just buy a single slice but instead had to buy an entire pie to get pizza. What do you do if you’re by yourself and don’t want eight slices? And why would you pay for a full pie when you really only wanted a slice or two?

Many new investors run into a similar problem when they begin building a portfolio. Stocks can be purchased in increments as small as one share, so the prevailing wisdom is to think of a share as a slice of the company’s pie or equity. But then look at a company like Amazon or Google — a single slice of that pie will cost over $2,500.

Let's re-imagine each share as a pie. That share can be cut up and distributed to investors who wish to build a diversified portfolio but can’t afford to fill it with individual shares of Amazon, Google or other four-digit-priced stocks. If that sounds like a good idea to you, you’ll be happy to know it already takes place at many brokerages.

Fractional shares allow capital-light investors to assemble diverse portfolios without needing to add leverage, borrowed money or an investment vehicle like an exchange-traded fund (ETF) or mutual fund.

Overview of Fractional Shares

A fractional share is a small piece of a share sold to investors who cannot afford to buy a full share. A fractional share isn’t purchased by entering the number of shares you want in a traditional buy or sell order. Instead, you enter the dollar amount you wish to spend on a certain stock and own the equivalent share fractions of that dollar amount.

For example, if you wanted to buy 10 shares of Amazon, you’d need about $33,000 to complete the order since each Amazon share is over $3,300 in August 2023. But if you wanted to buy $1,000 worth of Amazon, you’d purchase 0.3 shares from a broker offering fractional shares.

Where do fractional shares come from? If you have a retirement plan with an automatic dividend reinvestment option, you likely have purchased fractional shares already. Fractional shares can also be created from stock splits, mergers and acquisitions or capital gains distributions. Today, many brokers allow clients to purchase partial shares directly.

Why Should You Invest in Fractional Shares?

Investing in fractional shares is a good option for both new and experienced investors. It helps diversify portfolios without needing large amounts of capital. Unlike traditional shares, fractional shares allow you to buy parts of a share. This makes expensive stocks easier to access. This strategy opens the market to more people. Investors can own pieces of well-known companies and spread their investments across different sectors with a limited budget. Fractional shares also offer flexibility. You can adjust your investments based on market changes or your financial goals. With fractional shares, you can invest small amounts in high-quality stocks. This can help grow your wealth over time while managing risk. In the next sections, we will look at the benefits of fractional shares, how they work, and their place in your investment plan.

Affordability and Accessibility

Fractional shares allow investors to buy a portion of expensive stocks. This is helpful for individuals with limited budgets. It enables them to participate in the stock market without significant financial strain. Consequently, more investors can engage in the financial markets. This includes those who previously felt excluded due to high stock prices. This increase in investment opportunities can help more people grow their wealth over time.

Diversification

Fractional shares offer a major advantage. They allow investors to diversify their investments. Investors can spread their capital across various companies or industries, even with limited funds. By owning fractional shares in multiple stocks, they can reduce overall risk. This strategy improves the balance of their portfolios. It can also help lessen the impact of poor performance from any single stock. As a result, investors are not overly reliant on the success of just one or two companies. Therefore, fractional shares enable the creation of a more robust and resilient investment portfolio.

Efficient Use of Capital

Fractional shares allow for better capital use. Investors do not need to wait to buy whole shares of high-value stocks. They can start investing with any amount they have. This feature speeds up the investment process. It also encourages regular saving and investing. Fractional shares let investors allocate their funds more precisely. This facilitates strategic and thoughtful investing. Individuals can maximize their available resources. They can also take advantage of market opportunities as they arise.

Considerations Before Investing in Fractional Shares

Investing in fractional shares is becoming more popular. It offers an easy way for individuals to enter the stock market without needing a lot of money. With fractional shares, investors can buy a part of a share. This makes it simpler to build a diversified portfolio with smaller amounts. However, there are important factors to consider before investing. Understand the benefits and limitations of fractional shares. Assess your financial goals and evaluate the platforms for fractional investing. Also, check the fees for trading fractional shares, market conditions, and your risk tolerance. Taking these steps helps investors make informed decisions in this changing investment space.

Brokerage Fees and Commissions

Fractional shares can be a budget-friendly investment option, but it's important to understand any brokerage fees or commissions that may apply. Some platforms may impose higher fees for trading fractional shares, potentially reducing your investment returns, particularly for smaller transactions. Be sure to check your brokerage's fee structure to make sure it fits your investment approach.

Market Volatility and Risk Management

Investing in fractional shares comes with risks; it can even make you more vulnerable to the ups and downs of individual stocks, particularly if you're spreading your investments across different companies. It's important to evaluate your risk tolerance and recognize that although fractional shares can enhance diversification, the value of individual stocks can vary greatly. Creating a robust risk management plan that involves diversifying across different sectors and industries is essential.

Investment Goals and Strategy

Consider how fractional shares fit into your investment goals. Determine if you want long-term growth, income through dividends, or a combination of both. Fractional shares can help build a diversified portfolio. They are suitable for those who wish to invest small amounts regularly. Clearly defining your investment objectives will aid you. This clarity will help you make informed decisions about which fractional shares to purchase. It will also show how they align with your overall financial plan.

Where to Buy Fractional Shares

With more investors participating in the stock market thanks to commission-free online brokers and the popularity of meme stock investing, fractional shares are highly sought after. Brokers offering fractional shares include Cash App, SoFi Invest, E*TRADE and TD Ameritrade. Be sure to check with your particular broker of choice for stock availability and ask plenty of questions about fees and commissions. Here are a few of Benzinga’s favorite brokers offering fractional shares.

Other brokers offering fractional shares include Cash App, SoFi Invest, E*TRADE, and TD Ameritrade. Be sure to check with your particular broker of choice for stock availability and ask plenty of questions about fees and commissions.

Democratizing Investing

“Democratize investing” is a phrase thrown around by brokers like Robinhood who want to get new investors into the fray. Most of the time, it’s used as a marketing slogan to get new signups but adding fractional shares and selling them commission-free is a way to let new investors build diverse portfolios without requiring a mountain of money to start.

Buying index funds in a 401(k) is a sound retirement strategy, but many young people would like to build stock portfolios in taxable accounts and don’t have the funds to diversify. Fractional shares put diversification in reach for everyone, regardless of income. Just be sure to understand the additional risks that come with partial shares.

Are Fractional Shares Right For You?

Fractional shares can be a good choice for different kinds of investors, especially those seeking cost-effective options. They allow people to buy a piece of expensive stocks, making it simpler to diversify their investments without having to spend a lot of money. This is particularly helpful for new investors or those with smaller budgets, as it lets them invest set amounts regularly and supports steady wealth growth over time.

It's important to be aware of some potential risks. Investors in fractional shares might have restricted ownership rights since these shares may not provide the same voting rights or dividends as full shares. Furthermore, selling fractional shares can be more complicated and might come with certain brokerage restrictions, which could result in lower liquidity compared to traditional shares.

Fractional shares offer affordable investing and wealth-building potential, but investors should consider the risks involved. For those who understand these factors, fractional shares can be an effective part of their investment strategy.

Frequently Asked Questions