For many, the idea of investing in a company like Amazon or Google might seem out of reach, given their high share prices. But what if you could buy just a fraction of a share? Enter the world of fractional shares. This investing innovation is making it possible for everyday investors to get a slice of high-priced stocks with a smaller financial commitment.
What are Fractional Shares?
Fractional shares are just what they sound like: a fraction or a piece of a whole share of stock. Instead of buying one full share of a company, an investor can buy half a share, a quarter of a share, or even a smaller fraction.
How Do You Get Fractional Shares?
Dividend Reinvestment Plans (DRIPs): Historically, the most common way investors acquired fractional shares was through dividend reinvestment plans. When a company issued a dividend to shareholders, instead of taking the dividend as cash, investors could opt to reinvest the dividend to buy additional shares or fractions of shares.
Modern Trading Platforms: In recent years, various online brokerages and investment platforms have introduced the option to buy fractional shares directly. Platforms like Robinhood, Fidelity, and M1 Finance, among others, allow investors to purchase a fraction of a share for as little as $1.
Benefits of Investing in Fractional Shares:
Accessibility: With fractional shares, high-priced stocks become accessible to the average investor. If a share of a particular company trades at $1,200 and an investor only has $100 to invest, they can still acquire 1/12 of that share.
Diversification: Having the ability to buy fractional shares means investors can spread their investment across a variety of stocks without needing a large amount of capital.
Dollar-Cost Averaging: Investors can invest fixed amounts regularly, regardless of the stock price, which helps in reducing the average cost over time.
Dividend Earnings: Even if you own a fraction of a share, you're still entitled to dividends. The amount you receive will be proportional to the fraction of the share you own.
Example 1: Let's say you're interested in investing in Company A, which is currently trading at $500 per share. However, you only have $50 to invest. With fractional shares, you can purchase 1/10 of a share of Company A. Over time, as the value of Company A's stock increases or decreases, your fractional share's value will move accordingly.
Example 2: Imagine you have an investment budget of $1000, and you want to diversify across 10 different companies. Some of these companies might have stocks priced above $100, which would usually make it impossible to diversify without spending more. But with fractional shares, you can allocate $100 to each company irrespective of their individual share price.
Things to Consider:
Liquidity Concerns: Selling fractional shares might be a bit trickier than selling whole shares, although many modern platforms are streamlining this process.
Brokerage Differences: Not all brokerages offer fractional shares, and those that do might have different policies regarding minimum investments and trading.
Voting Rights: Depending on the brokerage and the specific share type, holding a fractional share might not grant you voting rights in a company.
Tracking and Management: As with all investments, it's essential to keep an eye on your fractional shares, ensuring they align with your overall investment strategy and risk tolerance.
Fractional shares are democratizing the investment landscape, offering opportunities that were previously out of reach for many. They provide a flexible entry point into the stock market, allowing for diversification and incremental investing. However, as with all investments, it's crucial to research and understand the nuances of the platform and the stocks you're investing in.