Fractions of shares allow investors to build a diversified portfolio of stocks and ETFs without the need for a lot of capital.

In this article, I’ll explain how fractional shares work, what’s good with them (and what’s not), and which investment companies are offering them.

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What are fractions of shares?

Some investment terms are difficult to define on the basis of the name alone, but the term “fractions of shares” is literal.

A share represents the ownership of a company. When you buy shares, you own shares, or equity, in a publicly traded company.

Until recently, if you wanted to buy shares in a public company, your only option was to buy at least one whole share. If the price of a single share was $ 1,000 and you didn’t have $ 1,000 to invest, you weren’t lucky to have that company’s shares in your portfolio.

Now, however, you can buy a fraction of a share of most public companies for $ 1 or less. The same goes for ETFs and even cryptocurrencies.

Says silver expert Clark Howard: “The advantage of fractional stocks is that you can own a lot more – a wider variety – of stocks than with the same amount. “

Individual stocks in Warren Buffet’s investment firm Berkshire Hathaway were trading well above $ 400.00 in June 2021.

You could invest in a mutual fund that had Berkshire Hathaway in its portfolio. But to own shares of the company yourself, before fractional shares, you would need over $ 400,000. Now you need $ 1.

And you could end up with fractional shares in your portfolio even if you don’t buy them up front. The other methods of holding fractional shares:

• Reinvest your dividends.
• Invest in a company that is doing a stock split.
• Invest in a business that is being acquired or involved in a merger.

How do fractional shares work?

You can buy a fraction of a share the same way you buy a full share.

First, identify the business you want to invest in. Next, determine the company’s ticker symbol. Use the ticker symbol to find the company in your investing app or website.

The next step varies. With Robinhood, for example – a leader in the fractional share space – instead of entering the number of shares you want to buy, select “Buy in dollars” and enter an amount as low as $ 1. Or select “Buy Stock” and enter an amount as small as 0.000001.

Once the transaction is completed, your fractional share will be part of your portfolio.

Are fractional shares the same in all investment companies?

There is a growing list of companies offering fractional shares. However, some brokerage firms restrict the shares they make available through fractional shares to a relatively small number of large companies. So it’s a good idea to research the stock split policy of a brokerage firm before you go to the trouble of setting up an account just for it.

How much do fractions of shares cost?

The minimum amount that each company allows you to invest through fractional shares varies. It is usually between $ 1 and $ 5, but sometimes as small as 1 cent.

Do fractional shares pay dividends?

Yes. If you invest in a fraction of a stock of a stock that pays a dividend, you are entitled to it. If the dividend is $ 1 per share and you own half of a share, you will get a dividend of $ 0.50.

Advantages of fractional shares

Here are some of the main advantages of fractional shares:

• Low cost diversification. Thanks to fractional shares, it is possible to invest in the 10 most expensive stocks in the United States for just $ 10. This makes the investment much more feasible for those who don’t have a lot of extra cash.
• Less cash investment dollars. Rarely does the amount of money you need to invest exactly match a whole number of shares. If you have $ 100 to invest and the share price of the company you want to invest in is $ 1, then great! You can buy 100 shares and you won’t have any money in your cash account. But let’s say the price is $ 30 per share. Without fractional shares, you would be able to buy three shares for a total of $ 90 and you would have $ 10 in cash. Fractions of shares allow you to invest the entire $ 100 in that business.
• Beneficial for the average cost in dollars. Starting from this last point, the best way to invest is often to take a portion of your income each paycheck or each month and invest it. Rather than trying to synchronize the market and buy at the best possible price, you are investing a constant amount at regular intervals. Your average price per share with this type of strategy will not be the lowest or the highest. It is much easier to practice cost averaging in dollars if you are not limited to investing only in whole stocks.

Disadvantages of fractional shares

Here are some of the potential drawbacks of fractional shares:

• Can encourage more active trading. The easier it is to buy into an investment, the easier it is to trade more actively. Active trading is generally not considered an ideal approach to investing in retirement.
• Limited selection of stocks and ETFs. The selection available to you through fractional shares varies depending on the investment company you use.
• Reduced liquidity. Fractions of shares do not trade as quickly or as easily as full shares. And some investment companies will not allow you to transfer fractional shares to them if you change companies.

Best Fractional Stock Investment Brokerages

Before you start looking for a new brokerage where you can trade fractional shares, take a look at the big picture and instead choose a business that best meets your overall financial needs. .

Then, if you think a different company would serve you better specifically for investing in fractional shares, be sure to review their policies.

Personally, I think Robinhood is the number one investment company for fractional shares. It is a good platform if you are new to it because it is so easy to use. In addition, Robinhood is among the most competitive investment applications in two key areas:

1. The volume of shares, ETFs available on the platform for investment in fractional shares. Robinhood also offers fractional investments for cryptocurrencies, although Clark is not a fan of crypto and does not view it as an investment.
2. Robinhood allows investors to buy assets for less than $ 1.

Determining the “best” fractional equity investment company depends on what you are looking to do. Here is some information on the fractional stock programs offered by a number of the larger investment firms.

Final thoughts

Fractions of stocks are an easy way to build a well-diversified portfolio, especially if you don’t have a lot of money to invest.

If you want to invest in individual stocks or ETF-based index funds, fractional stocks are a great option. It’s also a good idea to review Clark’s advice on saving and investing to make sure your investment decisions fit into a solid overall financial plan.

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