Let’s say you don’t have a lot of money to invest — maybe only a few hundred dollars — and you want to buy stock from a big company like Amazon or Google. Unfortunately, single shares in those companies can cost thousands of dollars. That’s where fractional shares come into play: they allow you to purchase only a small portion of a company’s stock for way less money than the full share price.
How do fractional shares work?
Fractional shares are pretty straightforward: Anything less than a full share of a publicly-traded company or ETF is considered a fractional share. You will need to go through a brokerage to purchase them, and you might be charged an additional fee for the service (Bankrate has a good list of recommended brokers here). Fractional shares are a great option if really like a company’s fundamentals but can’t afford the stock. Warren Buffet’s Berkshire Hathaway is a good example — most people can’t afford even a single share, currently valued at $600,300.
The advantages of investing in fractional shares
- Easier access to blue-chip stocks: Fractional shares give you increased access to sought-after stocks that have proven to be consistent winners over time.
- A cheap way to diversify your portfolio: Fractional shares can give you more flexibility to diversify a portfolio of stocks, even if you don’t have a lot of money. They also gives you more flexibility to fine-tune the type of stocks you want (like if you want to put more money into a variety of tech companies) or to adjust your level of risk.
- It’s easier to invest cash down to the last dollar: If your financial goals include investing a set amount of money each month, fractional shares make that easier, since you’re not tied to the exact price of the stocks you’re buying.
The downsides of investing in fractional shares
- Selection is limited: While fractional shares can give you access to more stocks, a lot of brokerages have limits on which companies you can invest in. This will vary depending on the brokerage you use, however.
- They aren’t as easy to sell: Fractional shares are harder to sell compared to full shares, and you likely can’t transfer them to other brokerage companies.
- They can encourage overtrading: Compared to just putting some money into an index fund, investing in fractional shares might encourage you to engage in short-term trading based on individual stocks. This is a much riskier strategy than passive investing.
- The transaction fees can add up: Since fractional shares trading encourage more trading with less money, you can end up paying a higher percentage of transaction fees on the total purchase price of each transaction.