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Nowadays, you don’t need a lot of cash to start investing. One approach to getting into the market when you have limited funds involves buying fractional shares as opposed to full shares of a company.
Purchasing less than a whole share allows for entering into the market on a smaller budget and investing on your terms. And using these type of purchases can be a way to diversify a portfolio without spending a great deal of money.
What is a fractional share?
Fractional shares are less than a whole share of a company. Buying a fraction of a share is a more affordable way to invest and can be helpful in diversifying your portfolio. Building a portfolio with fractional shares allows investors to invest in companies based on the amount of money they have available—rather than having to focus on buying a particular number of whole shares.
“A fractional share is a recent development in the investment industry wherein you’re able to buy a piece of a share in certain companies, thereby allowing investors with smaller dollar amounts to still invest in companies they otherwise couldn’t if the share price is too high,” says Scott Sturgeon, certified financial planner, founder, and senior wealth advisor at Oread Wealth Partners, a fee-only financial advisory and wealth management firm. “It’s kind of like going to buy a pizza—except that instead of buying the whole pie, you only buy a slice of the pie.”
For example, If a stock is trading at $100, but you only want to buy $25 worth, it is entirely possible to do so. “And as a result, you now own 25% of one share of that stock,” says Jon Klaff, general manager of Magnifi. “Fractional shares can help you get started investing with almost any amount.”
How do you buy fractional shares?
Purchasing a fractional share is a straightforward process. The first step is to open an investment account, and when doing so, ensure that the platform allows for buying fractional shares. Many online brokerage platforms support fractional share purchases for stocks, as well as exchange-traded funds (ETFs) and even mutual funds.
After identifying an investment platform that suits your needs, the next step is to deposit funds into the account, which will be ultimately used to make the purchase. It’s also important to spend some time researching shares and identifying those that align with your financial goals and risk tolerance.
“Once you know what you want to invest in, buying a fractional share on an investing platform is as easy as toggling from units, or number of shares, to dollars, typing in how much you want to spend, and then checking out like any other online payment,” says Klaff.
Pros and cons of fractional shares
Like any form of investing, there are pros and cons to consider when buying fractional shares. Here are a few factors to keep in mind if you’re thinking of buying fractional shares.
Pro: Lower barrier to getting started
One of the biggest benefits associated with fractional share investing is that purchasing stocks this way makes investing far more accessible. “Fractional shares lower the barrier to entry for first-time investors,” explains Sturgeon. “If someone in their teens or early twenties can get excited about investing by having ownership in brands or companies they like, that can have a really positive impact long-term, keeping them focused on saving and investing more over time.”
Pro: Access expensive stocks
Along with lowering the bar for entry to investing in general, fractional shares allow for purchasing premium stocks that may otherwise not be available to some buyers. With some stocks trading at thousands of dollars per share, fractional shares can provide a way to own a portion of a premium asset.
Pro: More flexibility
The upside of investing in fractional shares is that it allows for investing on your terms. “Fractional shares can help you to personalize your portfolio,” says Klaff. “They give you more flexibility in making investments, so you can choose exactly how much you want to buy and invest in a way that fits you.”
Con: Transfers aren’t available
Fractional shares, unfortunately, are not transferable. That means if you decide to switch from one brokerage firm to another or one robo advisor to another, the fractional share investments you made cannot go with you. This can be a significant drawback that you’ll want to consider carefully.
“In the instance, you’re not able to transfer fractional shares between brokerage firms, you’ll probably have to sell it,” says Sturgeon. It’s also important to understand that when you switch brokers, you may incur a tax event because you’re forced to sell the shares.
Con: Not available everywhere
Not all investing platforms or brokerages support fractional share purchases. You may have to search around to find a platform that offers this type of investing. In addition, not all stocks can be purchased on a fractional basis.
The takeaway
When you’re just getting started investing, fractional shares can offer a budget-friendly way to get into the market. Buying assets in this way allows for accessing a portion of costly stocks and allows for diversifying your portfolio without significant expense. But if you’re considering fractional stocks, be sure you select an investment platform that allows for buying them.
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