Fractional shares are portions of a stock that are less than one full share. For example, if a stock trades at $1,000 per share, but you only have $100 to invest, you can buy a fractional share of 0.1 of that stock. Fractional shares allow you to invest in high-priced stocks that you may not be able to afford otherwise. They also enable you to diversify your portfolio even with small amounts of money.
How to Buy and Sell Fractional Shares
Not all brokerage firms offer fractional shares, but most popular brokers often have them. Each broker has its own minimum investment amount, eligible stocks, and fees for fractional share trading. You should compare the different options and choose the one that suits your needs and preferences.
To buy fractional shares, you need to open an account with a broker that offers them and fund it with the amount you want to invest. Then, you can select the stocks you want to buy and enter the dollar amount or the fraction of a share you want to purchase. The broker will execute your order at the best available price and credit your account with the shares.
To sell fractional shares, you need to place a sell order with your broker and specify the dollar amount or the fraction of a share you want to sell. The broker will execute your order at the best available price and debit your account. You will receive the proceeds from the sale in your account balance.
Pros and Cons of Fractional Share Investing
Fractional share investing has several advantages and disadvantages that you should be aware of before deciding to invest in them. Here are some of the main pros and cons:
Pros
- Accessibility: Fractional shares make it possible for anyone to invest in high-priced stocks that they may not be able to afford otherwise. For example, if you want to invest in Amazon, which trades at over $3,000 per share as of October 20212, you can buy a fractional share of 0.01 for $30.
- Diversification: Fractional shares allow you to diversify your portfolio with small amounts of money and create a balanced mix of stocks across different sectors, industries, and market caps. For example, if you have $500 to invest, you can buy fractional shares of 10 different stocks instead of buying whole shares of one or two stocks.
- Dividend reinvestment: This also enables you to reinvest your dividends automatically and compound your returns over time. For example, if you own a fractional share of 0.5 of a stock that pays a dividend of $1 per share, you will receive $0.5 as a dividend and use it to buy more fractional shares of the same stock.
Cons
- Liquidity: Fractional shares are not traded on the open market, but through your broker’s platform. This means that you may not be able to sell your fractional shares at any time or at the price you want. You may also face delays or errors in executing your orders due to technical issues or market volatility.
- Costs: You may incur fees or commissions from your broker, depending on their pricing structure and policies. These costs can eat into your returns and make fractional share investing less profitable than buying whole shares.
- Taxation: Fractional shares may trigger capital gains or losses for taxable investors when they sell them or receive dividends from them. These tax implications can affect your after-tax returns and tax efficiency.
Conclusion
Fractional share investing is a way to buy portions of a stock that are less than one full share. This can make the stock market more accessible, diversified, and rewarding for small investors who do not have enough money to purchase whole shares. However, fractional share investing also involves some challenges and costs, such as liquidity, fees, and taxation. Therefore, it is important to understand the benefits and drawbacks of fractional share investing and how to apply it to your own portfolio.
