Fractional shares make it possible to buy portion shares of a company stock. When you buy an Amazon fractional share, for example, you are buying a portion of that stock. That means you can buy the priciest stocks and exchange-traded funds (ETFs) for as little as one dollar. This way you can decide how much money you want to invest in a company rather than how many stocks you want to buy, making it easier to diversify your portfolio.
What are fractional shares?
Fractional shares are portions or slices of a whole share of stock or ETF. For example, if you want to invest in Amazon that has a share price of more than $3000 but you only have $500, you can purchase one sixth of that share, that is done when you use a broker that offers fractional shares solution. Knowing that brokers have different minimum portions of shares, you can still buy a fraction of a stock as low as $1 with Wealthface.
In the past, investors could only buy fractions of a share in limited ways:
When a company splits its stock, the stock price falls while the number of shares increases.
In a 3:2 stock split, for example, you receive three shares for every two shares you own. So, if you previously owned 15 shares, you now own 22.5 shares. A fractional share is that extra half stock.
Dividend reinvestment plan (DRIP):
Dividends paid by a company or fund are automatically used to buy new stock. When this occurs, investors may be left with fractional stock. Assume you own 200 shares of a company with an annual dividend payout of $0.30 per share. In that year, you’d be entitled to $60 in dividends. If the stock is worth $40, dividends would automatically purchase one and a half shares. You would end up with 201.5 shares of stock.
Mergers and acquisitions:
When a company merges or is purchased, its stock may be exchanged for new shares. They typically use a ratio to combine stocks from different companies, which means that five shares of Company Y may become three shares of Company X, resulting in fractional shares.
Why should you buy fractional shares?
A one-share position in Tesla Inc. (NASDAQ: TSLA) stock costs $680, while Amazon.com Inc. (NASDAQ: AMZN) costs an even higher $3,400 – the list goes on. Generally, an investor with a small amount of capital may believe that those stocks aren’t for them, or that they must look elsewhere or settle.
If a stock is worth $3,000 per share, you’d need at least $3,000 to include it in your portfolio. If you want to purchase more than one share, you must pay $6,000 for two shares, $9,000 for three shares, and so on. If you don’t have that much money saved up, you’ll have to make another investment. However, with fractional shares, this is not the case. Fractional trading lets you buy the amount of stock you can afford as low as $1.
That’s where fractional shares come into play. If you want to invest in a high-priced stock but don’t want to put all of your money into a single company, a fractional share solution is an inexpensive way to get started. Here are some advantages of using a fractional share solution:
To build a well-diversified portfolio at a low cost
By purchasing portions of these expensive stocks, you can build a highly diversified portfolio of pricey stocks that could require tens of thousands of dollars in upfront capital. For example, if you have $5,000 to invest, you can allocate it to 10 different stocks rather than investing it all in one or two companies. This allows you to create a much more diversified portfolio.
To get the most of your investment
Dollar-cost averaging with fractional shares enables you to invest the entire amount of money you deposit into your investment account on a weekly or monthly basis. For example, if you contribute $100 per month and the stock you want to invest in is currently trading at $55, you will only be able to purchase one whole share. You’d be leaving $45 in uninvested cash in your brokerage account if you didn’t have the option to buy fractional shares.
How do fractional shares work?
When you purchase a fraction of a share, you are treated the same as any other investor who purchases a full share. You get the same percentage gains and benefits from stock ownership. You are also exposed to the same risk of loss.
Do fractional shares pay dividends?
When pursuing a dividend reinvestment plan, reinvesting dividends can result in the creation of fractions of a share. If you buy fractional shares of a dividend-paying stock, you will receive a payment based on the number of shares you own, just like any other investor. If shareholders receive a $1 dividend for each share owned but you own half of a share, you would then receive $0.50.
Dividends are a part of a company’s earnings that it can choose to distribute to its shareholders, allowing each fractional owner to share in the company’s profits. Companies may pay dividends at least once a year in amounts proportional to each investor’s stock share ownership. Dividends can be paid in cash or in the form of additional stock, a concept known as dividend reinvestment.
Can you sell fractional shares?
It is possible to sell fractional shares of a stock in the same way that you can sell any whole stock you own. If you purchased a half share through your brokerage and want to sell it, simply place a sell order with the same broker and cash out your holdings.
Fractional Shares and Stock Splits
If a stock undergoes a forward stock split, you will receive the relevant number of fractional shares. For example, if you own 2.5 shares of MEOW worth $10 each and MEOW experiences a 2 for 1 (2:1) forward stock split, you will now own 5 shares worth $5 each.
In the event of a reverse stock split, you will receive the cash equivalent of any fractional (non-whole) share amounts resulting from the split instead of shares. For example, if a stock split results in 2.1 shares worth $10 each, you will receive two shares and one dollar in which the cash is equivalent to 0.1 shares.
What’s the downside of fractional shares?
If you want to transfer your assets to a new broker, you won’t be able to do so if you own fractional shares. Whole shares are usually simple to transfer, but any fractional shares may need to be sold in order to transfer the resulting cash. Depending on your circumstances, this could result in tax implications, fees, or other unanticipated costs.
Can I buy exchange-traded funds as fractional shares?
Yes, ETFs are available as fractional shares through some brokers. ETFs are index funds that can be traded like stocks throughout the day, as opposed to traditional index funds, which can only be bought and sold at a set price at the end of the day. A single exchange-traded fund (ETF) can help significantly and easily diversify your portfolio. Purchasing multiple ETFs in fractional shares adds another layer of diversification.
Are fractional share rules the same across all brokers?
Because fractional shares are a relatively new offering, they may be handled differently by each broker, so it’s important to read the fine print for each to see what’s available. Wealthface, for example, provides fractional shares for any stock listed on a major exchange.
How can you buy fractional shares?
If you don’t have a lot of money to invest, fractional shares are an easy way to build a well-diversified portfolio.
Because of decisions made by the companies in which they have invested, some investors end up with fractional shares. Individuals cannot buy or sell fractional shares on the stock exchange, but they can do so through a broker, including some online trading platforms.
Investors can make purchases in fractional shares at a variety of locations, ranging from tech startups like Robinhood to established brokerage firms like Schwab. (It should be noted that investors should always conduct their own research, particularly regarding fees, and that all investments involve risk.)
Some brokerage firms will combine multiple shares to form a full share, sell you a fraction of a share to form a full share for you, or sell fractional shares to new investors. Not every brokerage offers this option, Fractional shares brokerage may handle them in their own unique way.
Before you start looking for a new brokerage where you can trade fractional shares, consider the big picture and choose a platform that best serves your financial needs overall, and make sure to read their policies.
If you want to invest in individual stocks or an ETF, fractional shares are an excellent choice. It’s also a good idea to schedule a call with Wealthface advisors to ensure that your investment decisions are well-integrated into a solid overall financial plan.
Wealthface allows you to trade fractional shares through the Wealthface Trade app by entering the dollar amount or fractional number you want to buy.