As the name suggests, fractional shares are portions of stocks that are less than a complete share. Typically when we invest in the stock market, we buy stocks in at least one full share. But recently, a number of brokerages have introduced fractional share investing. This means that investors can buy shares of stock in fragments, rather than buying an entire share. So, you actually instruct orders in decimals. This practice is beneficial for investors that wish to buy higher-priced stocks but use limited funds.
Remember that not every brokerage platform will offer fractional share investing. Gratis absolutely offers fractional share trading at zero additional cost! Good news? We hope it is.
How Do Fractional Shares Work?
A fractional share refers to a portion of a single stock. For example, an investor may own 1/4 of a share of Apple stock. Fractional shares can be beneficial for investors who want to buy shares of a high-priced stock, but don’t have enough money to buy a whole share.
Fractional shares are traded just like whole shares. They can be bought and sold through a broker. And, just like whole shares, the price of fractional shares will fluctuate throughout the day as the stock market moves up and down.
The main difference between fractional and whole shares is that fractional shares are often not entitled to voting rights. However, fractional shares do entitle the owner to receive dividends and capital gains.
There are several ways in which a fractional share can be acquired. Usually, fractional portions of shares are created as a result of a non-symmetrical, or unconventional, stock split or in the case of a DRIP or dividend reinvestment program.
A dividend reinvestment plan (DRIP) is an investment strategy where an investor chooses to reinvest their dividends instead of taking the cash. This reinvestment usually occurs through the purchase of additional shares of stock, which can create fractional shares.
Another instance where traders end up with fractional shares is through an unconventional stock split. If a stock performs an unconventional stock split like a 3 for 2 or a 4 for 3 split, you might end up with some fractional shares of that stock. For example, if Company XYZ performs a 3-for-2 split at the price of $20 per share, an investor who holds 105 shares will now own 157.5 shares at a price of $13.33.
Fractional Share Example
Let’s take a look at a couple of examples of how you might come across fractional shares.
Say you want to buy some fractional shares through a brokerage like Gratis: You want to buy one share of Tesla (NASDAQ: TSLA) which is trading at about $300 right now. But you have only $50. Through fractional share trading, you can still purchase 0.16666 shares of TSLA. Without fractional shares, you would need to find an additional $250 to invest in Tesla. Now that you have to option to instruct orders in decimals, you can benefit from fractional shares.
What are the Advantages and Disadvantages of Investing in Fractional Shares?
There are a number of advantages to fractional investing, particularly for new investors.
First, you can invest in any stock on the market without having a lot of capital in your account. Before their recent stock splits, Alphabet (NASDAQ: GOOGL) and Amazon (NASDAQ: AMZN) were trading for over $2,000 USD per share. These are both great companies to invest in, but not everyone can afford to buy a stock with such a high price. Fractional shares let you “join the party” even with limited resources.
It’s also a great way to use DCA or dollar-cost averaging over time to buy a stock. Let’s say that you can invest $500 each month into your stock portfolio. But if you want to spread it around, you put $100 each into Tesla, Apple, Amazon, Alphabet, and Microsoft. Well, over time you’ll eventually accumulate positions in each stock while also being invested in five different world-class companies. You can even use dips and pullbacks to accumulate larger fractions of the stock.
As far as disadvantages go, fractional investing is not available on every brokerage. Fractional shares also make it slightly more difficult to sell your shares. When you sell a fractional share, your brokerage needs to match it up with another fractional share to make a whole one. Of course, this is not really something you need to worry about but logically sell orders of fractional shares have the potential to take longer due to this matching process.
Should You Invest in Fractional Shares?
Everyone’s financial situation and investment strategy are different so always do your own research into how you want to build your stock portfolio. As we’ve mentioned, fractional shares are great for those who simply do not have the capital to buy as many shares of stock as they might want to. Even if you can, and you have a couple hundred dollars left in your account, then why not buy 0.66% of a share of Tesla?
When it comes to fractional investing, the benefit definitely outweighs the downside. With the only minor advantage being the potential for a slower sale of a fractional share, there isn’t any harm in buying them. The only time you might regret buying a fractional share is if the stock price rises significantly between orders. If a stock is $100.00 and you buy the first 0.50 share for $50.00, but then the price rises to $150.00, the next 0.50 will cost you $75.00. This means your cost basis for that stock will be $125.00 when you could have bought a full share at $100.00. But this level of volatility is highly improbable and fractional share trading is typically fast enough to avoid such cases.
Does fractional share investing sound like something you’d like to learn more about and incorporate into your personal investing strategy? Get on the waitlist now so that once you can sign up and download Gratis, you can start investing in either full or fractional shares with no trading fees!