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?
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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 $430,000.
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.
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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.