Fractional Investing: Get Started in the Market Without Much Money
You know you want to start investing, and maybe you’ve got your eye on some specific stocks that you think are promising. But when you look at some of the share prices out there, suddenly it doesn’t seem doable. Many publicly traded companies have share prices north of $100, and some, like Amazon and Alphabet Inc. (the parent company of Google), are over $1,000. How are you supposed to invest if you can’t afford to buy even a single share?
The good news is that you don’t have to buy an entire share at a time. A strategy called fractional investing allows you to purchase portions of a share. Here’s how it works.
What Is a Fractional Share?
As you probably inferred, a fractional share is a fraction of a full share. Depending on the company you invest in or the broker you use, it’s possible to buy a portion of a share. So, if a share costs $100, and you only have $25 to invest, you might be able to buy one-fourth of a share. You still get to invest in the company, but you don’t need to wait until you’ve saved up enough to buy a whole stock.
Fractional shares also result from stock splits and mergers and acquisitions. However, unless you already own stock in a company that’s offering a split, or that is involved in some other transaction, these methods of obtaining fractional shares probably don’t apply to you.
One of the easiest ways to purchase fractional shares is through dividend reinvestment plans. If you receive dividends on a stock, mutual fund, or ETF, some brokers and companies have automatic plans that reinvest those dividends to buy more shares. In many cases, you might receive $15 in dividends. The dividend reinvestment will automatically buy partial shares, based on the current stock price.
Benefits of Fractional Investing
When you invest using fractional shares, you benefit from flexibility and efficiency. You can start earning returns on your money earlier. Depending on the broker you use, and the companies you have access to, it’s even possible to begin investing with as little as $5 when you employ a fractional investing strategy. As you know, the earlier you start investing (and taking advantage of compounding returns), the better off you are in the long run.
Plus, with fractional investing, you have a chance to invest in companies that you might not be able to afford. Many of us can’t just buy a share of the highest price stock. Fractional investing gives you the opportunity to own a small piece of such companies—and benefit in a small way from their success.
Making use of dividend reinvestment plans can be an especially efficient way to build your portfolio with fractional investing. A dividend is a portion of a company’s profit. You receive a payout based on how many shares you own. If you allow for automatic reinvestment, you buy more shares with each dividend payment. And, as you buy more fractional shares with your dividend, you increase the size of your next payout. It’s a self-perpetuating cycle that benefits you a little bit at a time.
How to Buy Fractional Shares
Many online discount brokers that offer automatic investment plans also allow you to participate in fractional investing. If you agree to invest a set amount of money each month, the broker will automatically buy as much as possible (based on price) of your choice of the individual, ETF, or mutual fund shares. That could mean fractional shares if the amount you invest isn’t enough to purchase a full share.
Find out if the online broker of your choice allows for fractional investing. Realize, though, that many of these platforms will only allow it if you sign up for an automatic plan. If you trade occasionally, you might not be able to buy a fraction of a share.
You can also get started with robo-advisors and fractional startups that make it easy for you to invest when you only have a few dollars per month. Companies like Betterment, Motif, Stash, and Stockpile all offer fractional investing.
If you are just starting out as an investor, though, it might make sense, to begin with index funds, such as an S&P 500 ETF. While it’s not quite the same as owning Apple or Alphabet Inc. (the parent company of Google) stock, investing in an index fund that includes these stocks does allow you to benefit from that stock’s rise. Plus, you benefit from the performance of a wider swath of the market, rather than watching your portfolio live or die by how a handful of stocks perform.
Use fractional shares to start investing today, building a basis for your portfolio. As you learn more about investing, and as you start seeing returns, you can tweak your strategy to include different types of assets, and even start buying whole shares of some of the more expensive stocks.