Investing in the stock market could get really expensive, but what if you could just buy a small fraction or part of a single stock, that would allow you to invest in any company where you cannot buy a single full share. This levels the playing field for people who are on investing budget.
In this article, we will learn how to buy fractional shares.
The rise in interest in fractional shares over the past 10 years has aided in the emergence of a new investing trend. In fact, a record number of beginner, first-time investors were able to enter the market in 2020 because of fractional shares and the expansion of commission-free trading.
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Fractional shares are pretty much fractions or small pieces of a full share or a stock.
When you buy a fractional share, you are buying a part of a stock.
These are great because they help investors with a small amount of money start investing in stocks that cost a huge amount.
For investors, the ability to buy and sell fractional shares is relatively new, but the concept of fractional shares has been around for quite some time. For instance, if you make a contribution to a dividend reinvestment plan (DRIP), you end up owning a portion of the stock.
Similarly, if you buy an Exchange-traded fund (ETF), you are also owning many small fractions of stocks from many different companies.
Fractional shares work exactly the same as normal full shares.
Many brokerages let you buy and sell fractional shares just like any other shares.
With fractional shares, you get to make profits and losses just like normal shares but of course at a fraction. If a company pays dividends, you will receive a fraction of that too.
Some companies also allow investors with fractional shares to hold voting rights just like normal shareholders.
Assume the fictional company ‘XYZ’ is trading for $100 per share. You pick to invest just $50, creating you the satisfied holder of ½ share of ‘XYZ’ stock. If ‘XYZ’ proclaims a $1 disbursement, you would be given $0.50. If the ‘XYZ’ company’s share value rises by 10% from $100 per share to $110 per share, you will get 10% from $50 to $55.
Spending our imaginative price of $100 per share, if company ‘XYZ’ does a 2:1 stock split, you will now own one total share at $50, and the complete share owner would have two claims at $50. This does not adjust the sweeping expanse invested as the fractional share investors still have $50, and the entire share investor has a total of $100 financed.
In most cases, you can buy and sell fractional shares with ease as whole shares — but there can be a few difficulties that you should be conscious of, which we’ll cover in the next section.
Yes, it is. There is a misconception that you must desire to own one complete share in order to receive the full benefits of stock ownership, but this is untrue.
It doesn’t matter how many shares you hold, if the price of a stock increases by 10%, you will receive a 10% return on your investment. Additionally, fractional shares can enable investors to diversify their portfolios across dozens of stocks at a significantly lower cost than maintaining complete shares.
Now the exact process may vary slightly depending on your brokers but it should be very similar to the following steps:
1. Open a brokerage account with a company that allows fractional shares. Some of the companies that allow this are Ameritrade and, Fidelity.
2. Deposit funds in your brokerage. You can deposit as much or as little as you want.
3. Select a company’s stock that you want to invest in. Please remember that although some brokerage firms may permit you to buy fractional shares, it might not include all the companies you want to invest in.
4. You are set! Buy, sell, hold. Now it is time for you to make money.
The financial takeaway
An excellent approach to enter the stock market gradually and on your terms is through fractional shares. You can now buy stocks with little money that you probably couldn’t earlier. You can diversify your portfolio and begin investing right away with fractional shares without having to spend a lot of money.