You know you want to start investing, and maybe you have 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, such as 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.
- Fractional investing is a strategy that involves purchasing partial shares of stocks.
- Purchasing fractional shares makes it easier for small investors to buy stocks whose single share price is very expensive.
- You can purchase fractional shares through a dividend reinvestment plan or automated online plan, and directly through some brokers.
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.
If a share costs $100, for example, and you only have $25 to invest, you can buy one-fourth of a share. You could begin investing immediately rather than waiting until you've saved up enough to buy a whole share.
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, also called "DRIPs." 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 a few dollars in dividends. The dividend reinvestment will automatically buy partial shares based on the current stock price. Eventually, after enough dividends are reinvested, you can find yourself acquiring whole shares.
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 possible to begin investing with as little as $5 when you employ a fractional investing strategy. The earlier you start investing (and taking advantage of compounding returns), the better off you will be in the long run. Plus, with fractional investing, you have a chance to invest in companies whose shares you might not be able to afford.
Many people 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 to 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. If you allow for automatic reinvestment, you buy more shares with each dividend payment.
A dividend is a portion of a company's profit. If your stock pays a dividend, you receive a payout based on how many shares you own.
As you buy more fractional shares with your dividend, you increase the size of your next payout. It's a self-perpetuating cycle that increasingly 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.
You can contact the online broker of your choice to find out whether they allow for fractional investing. You can also find out the price of this service, which may be different from other investing.
Many of these platforms will only allow fractional investing if you sign up for an automatic plan. If you trade only 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 that offer fractional investing include:
- Charles Schwab
If you are just starting out as an investor, 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. stock, investing in an index fund that includes these stocks does allow you to benefit when they rise. 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.
Frequently Asked Questions (FAQs)
Can I make money with fractional shares?
You can make or lose money with fractional shares just as easily as you can with whole shares. The only thing that changes with fractional shares is the dollar amount you'll gain or lose. If the stock gains $10, and you own 0.25 shares, you would make $2.50 in profit.
Which brokerages offer fractional share investing?
Most major brokerages offer fractional share investing, including Charles Schwab, Betterment, SoFi, Fidelity, and InteractiveBrokers. You can try multiple brokerages and choose which you like best, based on their investment choices, app design, or trading resources.