In fact, it’s easy to invest in US shares even if you don’t have a lot of upfront capital. This is because many companies and brokers are now offering fractional shares – allowing you to buy even small portions of a company’s stock.
Investing in the US stock market is a very popular way of growing your savings, and many people from around the world put their money behind US companies. This is partially because of the political stability of the US, and partially due to the size of the market. The US stock market is the largest in the world and lists some of the best-performing stocks in the world.
It’s also one of the most expensive stock markets in the world. That can make it a daunting place, and make it seem like you need a lot of capital to establish any kind of position within the market. But this is not so.
In this article, we’ll look at fractional shares – what they are, how they work, and whether you should buy them.
What are Fractional Shares?
Fractional shares are, as the name suggests, a fraction of a particular stock. Instead of holding an entire stock, an investor with a fractional share might hold 10% of one, 1%, or even 0.001%.
Ten years ago, fractional shares were rare, because they were normally only created during a stock split where it was necessary to divide odd numbers of stocks evenly among investors. Nowadays, however, fractional shares are becoming much more common, and on many trading platforms, you can buy them directly.
Fractional shares are increasing in popularity for a number of reasons. Ten years ago, it would have been difficult and complex for companies, brokers, and investment platforms to keep track of fractional shares. Breaking up shares means that more people own a share in a company, and allowing investors to buy as little as 0.1% of a share means that large companies might quickly end up with millions of shareholders.
Advances in digital technology, however, have made that consideration obsolete. The powerful computer systems that sit behind online trading platforms are now more than capable of keeping track of this many investors. In this context, offering fractional shares has several key advantages for trading platforms and companies alike.
One of these is simply that buying a fraction of a share is cheaper than buying a full share. This allows people with little upfront capital to invest – boosting the funds under management through a particular platform and ultimately boosting investment in a company. Secondly, fractional shares offer companies a much more flexible way of managing their stock. Instead of having to use labor-intensive stock splits, they can simply allow the market to decide how many shareholders they need.
How do Fractional Shares Work?
For investors, fractional shares work in exactly the same way as owning “full” stocks. When you buy a fractional share, you must be treated the same as any other investor. This means that if you buy 50% of the stock, you will make the same percentage of gains and losses on the price of the stock.
Similarly, fractional dividend shares pay out dividends according to the fraction of them you own. If shareholders receive a $1 dividend for each share they own and you own a half share, you receive $0.50.
Buying and selling fractional shares also works just like regular stocks, with one small difference. Fractional shares allow investors to specify exactly how much they want to invest in a stock, rather than having to buy a set number of full stocks. This means that – technically, at least – if you have $1 to invest, you should be able to do that.
In practice, it doesn’t quite work like that. That’s because different brokers and platforms have different rules about how little of a stock you can buy. Even the most advanced trading systems consume resources, after all, and below a certain critical level, it doesn’t make business sense for brokers to accept purchases of shares. Similarly, the trading fees imposed on a per-transaction basis can make it inefficient to invest tiny amounts of capital in many purchases, rather than buying a larger block of stock.
Should I Buy Fractional Shares?
There are several key advantages of buying fractional shares, and this is the reason why fractional shares are becoming the standard way to invest in the stock market.
The first advantage is the one we’ve already mentioned – that fractional shares allow you to invest in huge companies with very little upfront capital. If you are just starting out as a trader, and have yet to build up significant investment capital, fractional shares offer an inexpensive way into the stock market.
Second, fractional shares give you the opportunity to access a much broader pool of investments. With fractional shares, you can buy a piece of any publicly traded business, including some of the biggest companies in the United States, which trade for thousands of dollars a share. Because there’s no company out of reach with fractional shares, you can make investment decisions not based on the amount of cash you have available but instead based on which companies you believe have the best chance of performing well over the long term.
Finally, there is the related point that fractional shares allow you to build a well-diversified portfolio with far less investment capital than would otherwise be required. If you have just $25 to invest, you could spend $5 to buy a partial share of companies in five different industries instead of being forced into spending your entire $25 to buy a single share of one company. This reduces risk in your portfolio.
The Bottom Line
Every investor should weigh the benefits and risks before purchasing any assets, but many will find that fractional shares are a good addition to their portfolio, because of the flexibility they offer.