What is a fractional share and how do you buy it?
It doesn’t take a lot of money to start investing these days. One approach to getting into the market when you have limited funds is to buy fractional shares as opposed to full shares of a company.
Buying less than a whole share allows you to enter the market with a smaller budget and invest on your terms. And using these types of purchases can be a way to diversify a portfolio without spending a lot of money.
What is a fraction?
Fractions of shares are less than a whole share of a company. Buying a fraction of a stock is a cheaper way to invest and can help diversify your portfolio. Building a portfolio of fractional stocks allows investors to invest in companies based on the amount of money available, rather than having to focus on buying a specific number of whole shares.
“A fraction of a stock is a new development in the investment industry that allows you to buy a stake in certain companies, allowing investors with smaller dollar amounts to still invest in companies they otherwise couldn’t if the stock price is too high,” says Scott Sturgeon, board-certified financial planner, founder and principal wealth advisor at Oread Wealth Partners, a fee-based financial advisory and wealth management firm. “It’s like buying a pizza — except you’re not buying the whole pie, you’re just buying a piece of the pie.”
For example, if a stock is trading at $100 but you only want to buy $25, it’s entirely possible. “And as a result, you now own 25% of a share of that stock,” says Jon Klaff, Magnifi’s general manager. “Fractional stocks can help you invest with almost any amount.”
How do you buy fractional shares?
Purchasing a fractional share is a straightforward process. The first step is to open an investment account, making sure that the platform allows for the purchase of fractional shares. Many online brokerage platforms support buying fractional shares for stocks, as well as exchange-traded funds (ETFs) and even mutual funds.
After finding an investment platform that suits your needs, the next step is to deposit funds into the account that will ultimately be used for the purchase. It’s also important to spend some time researching stocks and identifying those that align with your financial goals and risk tolerance.
“Once you know what you want to invest in, buying a fractional share on an investment platform is as easy as switching units or number of shares to dollars, typing in the amount you want to spend, and checking out like anyone else other online payments,” says Klaff.
Pros and cons of fractional shares
As with any form of investment, there are pros and cons to buying fractional shares. Here are a few factors to consider when considering buying fractional shares.
Pro: Lower barrier to entry
One of the biggest benefits associated with fractional stock investing is that buying stocks this way makes investing far more accessible. “Fractional shares lower the barrier to entry for first-time investors,” Sturgeon explains. “If someone in their teens or early 20s can get excited about investing by owning brands or companies they like, it can have a really positive impact in the long run and make them focus on making more over time save and invest.”
Pro: Access expensive stocks
In addition to lowering the barrier to entry for investing in general, fractional shares allow for the purchase of premium stocks that may not be available to other buyers. Because some stocks trade for thousands of dollars a share, fractional shares can offer a way to own a piece of a world-class asset.
Pro: More flexibility
The benefit of investing in fractional shares is that you can invest on your terms. “Fractional stocks can help you personalize your portfolio,” Klaff says. “They give you more flexibility in making investments, so you can choose exactly how much to buy and invest in a way that suits you.”
Disadvantage: bank transfers are not available
Unfortunately, fractional shares are not transferable. That means if you decide to move from one brokerage firm to another, or from one robo advisor to another, the fractional stock investments you made cannot go with you. This can be a significant disadvantage that you should carefully consider.
“In that case, you can’t transfer fractions of shares between brokerage firms, you’ll probably have to sell them,” Sturgeon says. It’s also important to understand that when you switch brokers, a tax event may arise because you are forced to sell the shares.
Disadvantage: Not available everywhere
Not all investment platforms or brokers support the purchase of fractional shares. You may have to look around to find a platform that offers this type of investment. Also, not all shares can be purchased in fractions.
take that away
If you’re just starting out in investing, fractional shares can offer a budget-friendly way to enter the market. Buying assets in this way gives you access to a slice of expensive stocks and allows you to diversify your portfolio without significant expense. However, if you are considering fractional shares, be sure to select an investment platform that allows for the purchase of those shares.
