So, you want to grow your money by investing in the best listed companies out there.
But alas, you realized that investing isn’t going to be easy, especially when stocks like Alphabet and Amazon trade for ~$100 before fees. Heck, Berkshire Hathaway, Warren Buffett’s infamous company trades for ~$442,765!
Fret not.
Good news, investors like us who are just starting out now have access to fractional shares! Let’s find out what they are and how we can start investing with little capital with fractional shares.
What are Fractional Shares?
Fractional shares refer to portion or slices of whole shares of a stock. Instead of buying a whole share, brokers now allow you to buy fractions of shares.
You can now buy $5 worth of Amazon, Alphabet or even Berkshire Hathaway without worrying that you don’t have enough capital to invest in these stocks.
You can choose to indicate your trade volume by dollar value or share amount. Do note that the minimum dollar value and smallest share fraction varies across brokers.
Which brokers offer fractional shares?
| Broker | # of stocks you can buy fractional shares with | What can you buy? | Minimum Amount (USD) |
| Charles Schwab | 500 | S&P 500 stocks | $5 |
| Fidelity | 7000 | Stocks and ETFs listed on NYSE or Nasdaq | $1 |
| Interactive Brokers | 10990 | For eligible U.S. and European stocks and ETFs | $1 |
| M1 Finance | 6000 | Stocks and ETFs that are listed on NYSE and the NASDAQ | $1 |
| Robinhood | ~5000? | Applicable to stocks (supported by Robinhood Financials) worth over $1.00 per share with a market capitalization over $25,000,000 | $1 |
| Sofi | 400 | Stocks and ETFs listed in the US | $5 |
| Webull | ~5000? | Available for equities and ETFs, you can check via the webull app, but they do not publicly share a list. | $5 |
Are Fractional Shares Worth It?
Fractional shares provide an opportunity for investors who may not have the funds or access to invest in larger stocks, such as Amazon and Apple.
Hence, if you’re a young investor with limited capital to invest, you’ll find that fractional shares are a godsend.
Here’re 4 advantages of investing using Fractional Shares:
1) Access higher priced stocks
Fractional shares allow investors to gain access to high-priced stocks that would be difficult or impossible for them to buy whole shares of with their limited amount of capital.
Stocks like Berkshire Hathaway (Class A) don’t do stock splits which means that its share price will keep going up, preventing new investors from getting in. Having the option of investing in fractional shares allows you to gain access to such stocks.
Instead of being limited to lower quality penny stocks, you can now invest in the best stocks even with a small capital.
2) Achieve diversification on a small capital
You can build a diversified portfolio by purchasing smaller amounts of multiple companies rather than investing all your money into one company at once.
This can help reduce risk while also giving you exposure to different markets and industries. By investing in fractional shares, you can benefit from the potential growth of individual stocks without having to commit a large amount of capital upfront.
3) Greater Flexibility with similar returns
With fractional shares, you have the flexibility to invest what you can comfortably and build up your portfolio over time. Owning fractional shares allow you to ride on the same growth in share price and also collect dividends.
You will also be able to sell your fractional shares as easily as with a whole share (assuming that the stock enjoys good liquidity).
4) Dollar Cost Average with ease
Instead of having to transfer a fluctuating amount of capital each month, fractional shares allow you to buy a fixed amount of a stock each month easily.
Not sure if DCA is for you? Read this
What to look out for when buying fractional shares?
Although the concept of fractional shares sound great, there are some disadvantages you should note if you invest in them!
Limited choice of stocks
Although I did say that fractional shares help to open up your option, you may be limited by your broker’s offering of stocks with fractional shares options.
Refer to the table above for the most popular brokers are offering at the point of writing.
Also, you should note that although fractional shares are available for US stocks, they may not be readily available in other markets. If you’re looking to invest in foreign (non-US) stocks, you’ll need to check if they offer fractional share options.
Shareholder rights
Although you will enjoy the financial rewards of owning a good stock through fractional shares, you should note that you may not be entitled to all the shareholder rights. For example, you may not be able to vote on key company issues if you own less than a whole share. You would also unlikely be entitled to any rights issues.
If you’re passionate about a company and want to take part in voting as a shareholder, you may want to build up your shareholdings over time.
Immobility of portfolio
Although fractional shares are a common feature for many brokers, most do not allow you to transfer your fractional shares to other brokers. Many would not accept incoming transfers of fractional shares either. This is due to the complexity of managing the fractional share ownership across numerous accounts.
This inconvenience could be a dealbreaker for you, so do check on your broker’s fractional share policy before you invest!
Cost of investing with Fractional Shares
Most brokers offer $0 commission on fractional shares which really helps when you’re an investor with a small portfolio.
On the flip side, if your broker charges a commission on fractional shares, you may want to avoid buying fractional shares with them as the fees will most likely eat up your returns.
Other fees
Although most brokers offer $0 commission on fractional shares, there may be other fees involved!
For example, U.S. Securities and Exchange Commission (SEC) & Financial Industry Regulatory Authority (FINRA) fees may apply when you sell your fractional shares.
Conclusion
Fractional shares allow young investors who are just starting out to own and invest in high valued stocks (and ETFs) for as little as $1. It also allows you to diversify and slowly grow your portfolio with less upfront capital.
If you’re looking to invest in fractional shares, make sure you understand what’s involved and what the potential limitations are. This way, you’ll be able to make sound investment decisions that fit your risk profile!
Good luck in your investing!