Fractional shares allow investors to buy a portion of a stock, making it easier for those with limited funds to invest in high-priced stocks or build diversified portfolios. Unlike traditional shares, fractional shares are portions of a whole share, typically created through mechanisms like stock splits, dividend reinvestment plans (DRIPs), or intentional splitting by brokerages.
Key Takeaways
- Definition: A fractional share is a part of a whole share, allowing investors to buy portions of expensive stocks based on a dollar amount rather than the number of shares.
- How They’re Created: Fractional shares often result from DRIPs, stock splits, mergers, acquisitions, and intentional broker splits.
- Buying and Selling: They’re available through online brokers and robo-advisors but aren’t traded on the open market, which can make selling fractional shares more challenging.
How to Buy Fractional Shares
Investing in fractional shares has become simpler with the rise of online brokerages and robo-advisors. Here’s a step-by-step guide to help you get started:
- Research Brokerages That Offer Fractional Shares: Not all brokers provide fractional shares, so it’s essential to identify which brokers or robo-advisors offer them and check their list of eligible stocks and ETFs.
- Choose Between a Brokerage and Robo-Advisor:
- Online Brokerages: Provide control over specific stocks, allowing you to select your fractional share investments.
- Robo-Advisors: Use algorithms to choose investments for you, balancing your portfolio according to your risk tolerance and goals. This hands-off approach may appeal to investors who prefer automated management.
- Open and Fund Your Account: Once you’ve chosen a brokerage or robo-advisor, open an account and deposit funds. Most brokers allow funding through electronic transfers, though it may take a few days for your funds to settle.
- Select Fractional Shares to Buy: If using a brokerage, decide which stocks or ETFs to buy in fractions. Set a dollar amount rather than specifying the number of shares.
- Monitor and Adjust Your Investments: Many brokerages offer dashboards to track portfolio performance. Advanced features, like stock alerts or automatic rebalancing, can help you maintain your target asset allocation.
Examples of Brokerages Offering Fractional Shares
| Platform | Fractional Shares | Fractional Dividend Reinvestment | Available Securities |
|---|---|---|---|
| Fidelity | Yes | Yes | Over 7,000 stocks and ETFs |
| Interactive Brokers | Yes | No | More than 11,000 stocks, ETFs, and ADRs |
| Charles Schwab | Yes | Yes | All S&P 500 stocks only (no ETFs) |
| Robinhood | Yes | Yes | Stocks and ETFs meeting volume/size criteria |
Benefits of Fractional Shares
- Affordability: Fractional shares allow you to buy high-priced stocks without needing to purchase a full share. Investors can start with as little as $1, which makes investing more accessible.
- Diversification: With fractional shares, investors can spread a smaller amount across multiple stocks, creating a diversified portfolio without needing to purchase entire shares in each company.
- Dollar-Cost Averaging: By consistently investing a fixed dollar amount, investors can buy fractional shares regularly, reducing the impact of short-term price fluctuations and potentially lowering their average cost per share.
Drawbacks of Fractional Shares
- Limited Selection: Fractional share availability varies by brokerage, with some firms offering only certain stocks and ETFs in fractional form. It’s important to confirm which assets are available before opening an account.
- Liquidity Concerns: Fractional shares may be harder to sell than whole shares since they aren’t directly traded on exchanges. Some brokerages may have specific policies or delays for selling fractional shares, so confirm with your broker about liquidity options.
- Transferability: Moving fractional shares to another broker is often difficult, and you may be required to sell these shares before transferring, potentially incurring tax consequences.
- Voting Rights and Dividends: Some brokerages may not offer voting rights for fractional shares, and dividend payouts will be proportionate to the fraction you own. For example, if a stock pays a $0.40 dividend per share, an investor with 0.25 shares would receive $0.10.
- Trade Execution Timing: Some brokerages may not execute fractional share trades in real time, instead settling trades in batches. This can affect the price at which your trade is completed, especially on volatile trading days.
- Complexity at Tax Time: Frequent fractional purchases can lead to multiple tax lots, complicating capital gains reporting. Additionally, dividend reinvestment can increase tax lots if the company issues dividends frequently.
How Fractional Share Investing Works
Buying fractional shares typically involves setting a specific dollar amount to invest rather than choosing a certain number of shares. For example, if a stock trades at $100 per share, investing $25 would buy 0.25 shares. When dividends are issued, investors receive a fraction of the dividend relative to their share portion.
One unique example of fractional share offerings is Charles Schwab’s “Stock Slices”, which allows investors to buy fractions of up to 30 S&P 500 companies in a single transaction. Unlike mutual funds, which offer a diversified basket of stocks, stock slices enable investors to customize their own portfolio of fractional shares.
Fractional shares provide an accessible entry point to investing, enabling investors with limited funds to buy high-priced stocks and diversify their portfolios. However, it’s essential to understand the broker’s policies on liquidity, fees, and asset availability. Fractional shares can be a practical and powerful way to invest, particularly for beginners and small-scale investors aiming to build wealth over time.
