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Learn the various ways to buy fractional shares.
If you’ve ever wanted to invest in a company’s stock but didn’t have enough money to buy a whole share, or if you want to spread your funds across different investments, fractional shares could be a way to start investing without needing a lot of money. Fractional shares let you buy just a piece, or fraction, of a stock based on how much money you can afford, not how many shares there are. This method is good for investors who don’t have much money but still want to build a diverse portfolio. We’ll explain how fractional shares work and answer common questions to help you start investing.
How to Buy Fractional Shares
To buy fractional shares, you must open an investment account online through a broker or a robo-advisor. The big difference is how much control you want over which fractional shares you buy. With a broker, you decide which ones to buy. With a robo-advisor, you just set how much money you want to invest and your goals, and the robo-advisor picks the fractional shares for you. It also keeps your investments balanced to match your goals.
Step 1: Research the fractional shares you want to buy. Different brokerages offer different options for buying fractional shares. Knowing which stocks you want to invest in using fractional shares can help you choose the right brokerage.
Step 2: Open an online broker or robo-advisor account. Not every online broker or robo-advisor provides fractional shares, so you need to check if the company you’re interested in offers this service. Also, remember that each brokerage may have its unique way of offering fractional shares, including some small differences.
- What stocks can you buy as fractional shares?
- How trades are carried out and finalized
- Costs
Step 3: Fund the account. Once you open your account, you must deposit funds into it. Most online brokers accept electronic transfers, but the money might take a few days, delaying your ability to start investing immediately.
Step 4: Complete and monitor your investment. Managing your investment portfolio is straightforward with most online accounts. The main dashboard gives you a quick overview of all your holdings. Additionally, some platforms offer advanced features like stock alerts or automatic rebalancing, depending on the services provided by your specific online brokerage.
Compare Top Platforms for Investing in Fractional Shares
| Platform | Fractional Share Purchases | Fractional dividend reinvestment | Available Securities |
| Fidelity | Yes | Yes | More than 7,000 stocks and ETFs |
| Interactive Brokers | Yes | No | More than 11,000 stocks, ETFs and ADRs |
| Charles Schwab | Yes | Yes | All S&P 500 Stocks only, No ETFs |
| Robinhood | Yes | Yes | ETFs and stocks above the volume and size thresholds |
Is There a Downside to Fractional Shares?
Although there are many advantages to investing in fractional shares, it’s important to be aware of the potential downsides as well:
Limited stock selection: Not every publicly traded stock is available for fractional share purchase. Each brokerage offers a specific selection of stocks that investors can buy in fractions.
Potential problems transferring fractional shares to a different broker: transferring your account might not include the fractional shares when switching to a different brokerage. You might have to sell off any fractional shares before making the transfer.
Proxy voting may not be an option: Each company has its approach to proxy voting for fractional shares. It’s important to understand your company’s policy on this in advance.
Additional fees: Certain brokerages may impose extra charges for investing in fractional shares. These fees could eat into your profits, particularly for smaller investment sums. Before investing, check if any fees are linked to fractional shares and whether they’re fixed or a percentage of your investment.
Trade execution may not occur in real-time: If your brokerage doesn’t immediately finalize your trades, it might impact the cost basis of your investments. Some companies group all fractional share transactions and settle them in bulk rather than individually. Since prices change throughout the trading day, knowing how your trades will be settled is crucial.
Can complicate tax returns: Investing in fractional shares means you might accumulate multiple small portions of stock over time, which can complicate your tax calculations. This can be especially tricky if you reinvest dividends automatically, as it adds even more separate portions of stock to keep track of the coming tax season.
Factors to Consider When Investing in Fractional Shares
Selection of stocks and ETFs available for fractional share investing: Before opening an account, it’s crucial to understand that each online brokerage has its own set of stocks or ETFs available for fractional share investing. Some firms provide ETFs for fractional investing, while others don’t. Additionally, selecting individual company stocks offered in fractional shares can vary between brokerages. It’s wise to review each brokerage’s list of fractional share stocks and ETFs before deciding.
Fees and commissions: Before you open an account, it’s essential to know that certain brokerages offer commission-free fractional share investing, while others may have additional fees. Understanding the brokerage’s policy on this is crucial.
Account minimums: Many companies don’t require a minimum amount to open or keep an account. Usually, investors can purchase fractional shares for as little as $1. However, the minimum balance and investment requirements vary between different brokers.
Research amenities: After opening an online broker or robo-advisor account, you’ll gain access to research tools. These platforms offer analysts’ evaluations of companies, aiding you in deciding which stocks to invest in.
Educational content: Understanding how to invest wisely, what to invest in, and how to achieve your financial objectives is crucial. Educational materials provided by your brokerage can assist you in comprehending which investments align with your goals. Additionally, these resources can help you make the most of your account features for tracking and managing your investments effectively.
FAQs
1. What Are Fractional Shares?
Ans: Fractional shares are just a part of a full share of stock. When you invest in fractional shares, you’re buying a piece of a stock rather than a whole share. This approach lets you invest based on a specific dollar amount rather than the price of an individual stock or a set number of shares. Buying fractional shares makes it easier for investors to get started with less money, getting them into the market sooner.
Trading fractional shares has been a concept since 1999, but it wasn’t widely accessible or financially practical until around 2019. A few companies offered this option with low fees before then, but it didn’t last. In 2019, online brokers significantly reduced or eliminated fees, making investing in fractional shares more beneficial. Before 2019, having fractional shares in your portfolio was mostly due to specific situations like owning mutual funds, stock splits, dividend reinvestment programs, or corporate mergers and acquisitions.
2. How Does Fractional Share Investing Work?
Ans: Your experience with fractional share investing will vary depending on the brokerage you choose. Each brokerage has its own rules and offerings, so it’s crucial to know exactly what’s available before making your investment decision.
For example:
- The selection of stocks and availability of ETFs for fractional share investing vary between brokers.
- Certain brokers may impose extra charges for investing in fractional shares.
- Some brokers allow real-time trading of fractional shares, while others bundle all fractional share trades into larger orders. This difference in timing could impact the share price, especially if the stock price changed significantly between the time the order was placed and when it was executed.
When you buy only a portion of a share, you’ll also receive only a portion of the stock’s dividends. For instance, if a stock costs $100 per share and you invest $25, you’ll own one-fourth of a share. If the stock pays a dividend of $0.40 per share, you’ll receive one-fourth of that dividend, which is $0.10.
Charles Schwab is one of the online brokers that lets you invest in fractional shares, which they call “slices.” With Schwab’s stock slices, you can buy portions of 30 different stocks from companies in the S&P 500 index all at once. These slices can be held and sold separately. It’s similar to investing in a mutual fund, but you can trade individual stocks or slices of stocks.
3. Are Fractional Shares a Good Idea?
Ans: Investing in fractional shares has advantages: it’s affordable, helps diversify your portfolio, and allows for dollar-cost averaging.
Affordability: You don’t need to save hundreds or thousands of dollars to buy stocks. With many online brokerages, you can start investing in fractional shares for as little as $1.
Diversification: Investing smaller amounts and diversifying used to be limited to mutual funds. But now, with many brokerages offering fractional shares, investors can pick specific companies to invest in and trade these fractions whenever they want. This differs from mutual funds, which are bought and sold as a bundle of stocks. Investing in fractional shares lets investors spread their money across multiple stocks instead of putting it all into one company to buy whole shares.
Dollar-cost averaging: Investors now have the choice to invest a set dollar amount each month by buying fractional shares. This regular investing strategy helps them benefit from market price changes and reduces risk exposure.
4. Can You Buy Fractional Shares Through Fidelity?
Ans: Required and fractional share investing starts at just $1. Fidelity makes opening an account and investing in fractional shares simple. Investopedia also ranked Fidelity as the top online broker for ETFs. So, if investing in fractional shares of ETFs is important to you, Fidelity is a great option. Fidelity offers investors over 7,000 US stocks and ETFs to purchase fractional shares.
5. Do Fractional Shares Make You Money?
Ans: Investing small amounts of money may not appear lucrative. However, if you approach it like regularly contributing to an IRA or 401k, those small investments can accumulate into substantial savings over time. While each purchase only buys a fraction of stock or portions of multiple stocks, consistent investing over months or years allows these fractional shares to grow, potentially turning into full shares of various stocks.
6. Can You Buy Exchange-Traded Funds (ETFs) as Fractional Shares?
Ans: Certain companies offer ETFs as fractional shares. Since each brokerage offers different fractional share offerings, it is crucial to check if your chosen firm offers ETFs as fractional shares and what other stocks are available on its list.
7. Are Fractional Shares Harder to Sell?
Ans: Whether or not you can easily sell fractional shares depends on how your brokerage manages them. Some brokerages don’t ensure the liquidity of fractional shares. This varies among brokers, so it’s important to consider where to invest. Liquidity means how easily you can sell a stock or security and turn it into cash. Even though you can buy fractional shares, selling them might not be as simple as selling whole shares.
