Fractional Shares: What They Are & How Do They Work?

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Do you have an eye on a popular stock, but it’s pricey, and you don’t want to invest all your savings in a single company?

The good news is, you can start investing in fractional shares as low as $5 and buy a fraction of a company regardless of its per-share price.

Let’s discover what a fractional share is and how it works.

What Is a Fractional Share?

A fractional share is less than a full share in a company. In other words, it’s just a fraction of a share instead of a full share.

For example, instead of purchasing a complete share in a business, you could buy 1/10th of a share, giving you a dividend of .1 in the company.

Why Might You Buy Fractional Shares?

There are a few reasons you might want to buy fractional shares. Let’s review each reason in detail.

To Invest in Stocks, You Couldn’t Otherwise Afford:

Full stocks might be pretty expensive, especially in large companies that have the most return potential. However, fractional shares can help you invest in companies that you couldn’t otherwise afford. 

For example, you want to buy an Amazon share. But it costs around $3,500 per share – it’s the amount you’re not okay investing. Fractional trading enables you to buy the percentage of stock you can afford. What’s good, you can start investing in fractional shares with as low as $5 and still leverage the dividend income relevant to the share you own.

To Build a Diversified Portfolio:

Diversifying a portfolio is an excellent strategy to maximize your returns and minimize the risks of losing all of your funds.

But some of the most popular stocks like Amazon, Apple, Netflix, and Tesla are also expensive. You wouldn’t want to buy them at full prices as they can quickly rack up thousands of dollars. But investing in fractional shares allows you to build a well-diversified portfolio at a fraction of that cost.

Let’s say you have only $500 to invest. With fractional shares, you can allocate a certain amount of your money towards each company of your choice. If that’s 10%, you could invest in 10 different companies regardless of their share price.

Pros & Cons of Buying Fractional Shares:

Pros

Investing in fractional shares comes with a lot of benefits. These include:

● It makes it easy for anyone to invest in any company, regardless of that company’s share price.

● Investing in fractional shares is an inexpensive solution. This way, you can buy and hold shares of a company that you’d otherwise afford. Plus, you can diversify your portfolio and invest in multiple companies at the same time.

● You don’t need to be an accredited investor to invest in fractional shares.

● Since you’re able to invest in fractional shares with as low as $5 (up to as much as you’d like), it eliminates the risks of losing a lot of money.

Cons

There are a few drawbacks to investing in fractional shares. These include:

● Since investing in fractional shares makes it easy to buy minimal stakes in many different companies, it can easily rack up fees. If the brokerage you’re investing with charges commissions, you might end up paying a lot of fees when you decide to diversify your portfolio.

● Another disadvantage is that not all brokerages allow you to buy or hold fractional shares. This might limit your choice of brokerages to work with.

What Online Brokers Offer Fractional Shares?

Some of the online brokers that allow you to invest in fractional shares include:

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