If you’ve ever wanted to invest in a particular company’s stock, but didn’t have enough money to buy even one share, or you want to effectively diversify your funds, investing in fractional shares might be an affordable way to get started. Fractional shares allow investors to buy a portion, or fraction, of a stock based on a dollar amount that the investor can afford–not based on a particular number of shares. Implementing this type of strategy is propitious for investors who may be starting out with a limited amount of money, but still want to build a diversified portfolio. We’ll take an in-depth look at how investing in fractional shares works and answer the basic questions that investors need to know to get started.
How to Buy Fractional Shares
In order to buy fractional shares, you will need to open an investment account through either an online broker or a robo-advisor. The main difference between the two is whether you want to have full control over which fractional shares you are investing in, or if you want to have a more hands-off approach. With a robo-advisor, you will be able to set your dollar amount to invest and your investment goals, and based on that, the robo-advisor will choose your fractional share investments and automatically rebalance to keep you within your investment goal range.
Step 1: Research the fractional shares you want to buy. Fractional share offerings will differ between brokerages, so knowing which stocks you want to be able to invest in via fractional shares can also help determine which brokerage you may want to use.
Step 2: Open an online broker or robo advisor account. Not all online brokers or robo-advisors offer fractional shares, so you will need to make sure the company you want to go with offers that service. It is also important to remember that every brokerage has slightly different nuances to the way they offer fractional shares, such as:
- Which stocks can be bought in fractional shares
- How trades are executed and settled
Step 3: Fund the account. You will need to fund the account once you open it. Many online brokers can be funded via electronic funds transfer, but it still may take a few days for the funds to settle, so you may not be able to invest right away.
Step 4: Complete and monitor your investment. Most online accounts make it very easy to monitor your portfolio using the main dashboard. Typically, you are able to see all of your account holdings at a glance, but you may also be able to utilize more advanced options, such as setting up stock alerts or automatic rebalancing, depending on what is offered by your particular online brokerage.
Compare Top Platforms for Investing in Fractional Shares
|Platform||Fractional Share Purchases||Fractional dividend reinvestment||Available Securities|
|Fidelity||Yes||Yes||More than 7,000 stocks and ETFs|
|Interactive Brokers||Yes||No||More than 11,000 stocks, ETFs and ADRs|
|Charles Schwab||Yes||Yes||All S&P 500 Stocks only, No ETFs|
|Robinhood||Yes||Yes||ETFs and stocks above the volume and size thresholds|
Is There a Downside to Fractional Shares?
While there are several benefits to investing in fractional shares, the following drawbacks are also worth considering:
Limited stock selection: Just because a stock is publicly traded does not mean that you will be able to buy fractional shares of it. Each brokerage has their own curated list of stocks that investors can buy fractional shares of.
Potential problems transferring fractional shares to a different broker: If you want to transfer your account to another brokerage, you may not be able to transfer the fractional shares. You may need to liquidate any fractional shares in order to transfer.
Proxy voting may not be an option: Again, each firm also handles proxy voting differently regarding fractional shares. Make sure you know your company’s policy on this ahead of time.
Additional fees: Some brokerages charge additional fees for fractional share investing. This can potentially decrease profits, especially for low-dollar investment amounts. Find out if there are fees associated with fractional shares and if they are flat fees or a percentage.
Trade execution may not take place in real time: If the brokerage that you are investing with does not settle your trade in real time, that could affect your cost basis. Some firms will settle all the fractional shares in one or more bulk orders rather than settling each order individually. Obviously, prices can fluctuate throughout a trading day, so understanding how this will be settled is important.
Can complicate tax returns: Because you are buying fractional shares, and may buy several fractional shares throughout the year, depending on your investment strategy, you may end up holding several different tax lots that may be difficult to match up at tax time. If a stock you own has a dividend that you automatically reinvest, you will have additional tax lots to deal with.
Factors to Consider When Investing in Fractional Shares
Selection of stocks and ETFs available for fractional share investing: Because each online brokerage has its own select list of stocks or ETFs that they offer for fractional share investing, it is important to know this ahead of time. Some firms will offer ETFs, others will not. One company may offer fractional shares of an individual company, while others may not. Be sure to check out each brokerage’s list of fractional share stocks and ETF offerings before opening an account.
Fees and commissions: Some brokerages will be commission-free when it comes to investing in fractional shares, while others may charge additional fees. It is important to find out the brokerage’s policy on this prior to opening an account.
Account minimums: Many companies have no account minimum to open or maintain the account. Often, investors can buy fractional shares for as low as $1. Balance and investment minimums will differ from broker to broker.
Research amenities: Once you open an account with an online broker or robo-advisor, you will have access to research amenities. Brokers will provide analysts’ assessments of companies, which can help you determine which stocks you’d like to invest in.
Educational content: Knowing how to invest, what to invest in, and how to reach your financial goals are important. Educational content provided by your brokerage can help you to better understand which investments will help you reach your goals, and even how to better utilize your account amenities to track and monitor your investment.
What Are Fractional Shares?
Fractional shares are very simply a portion, or fraction, of a whole share. When investing in fractional shares, you will buy a portion of a stock share. With this strategy, you are investing based on a dollar amount, not an individual stock’s price or certain number of shares. Buying fractional shares provides investors with a lower entry point of accessibility, thereby allowing investors to gain market entry sooner.
While the concept of trading in fractional shares has been around since 1999, the strategy really wasn’t widely available—or financially feasible—until 2019. A few low-fee companies offered fractional shares at that time, but this didn’t last very long. Around 2019, online brokers cut fees drastically to offer low fees or no monthly fees, thus creating a path for investing in fractional shares to become advantageous. Prior to 2019 your portfolio may have had fractional shares, but it was most likely due to a few, limited circumstances: owning mutual funds, stock splits, dividend reinvestment programs, or company mergers or acquisitions.
How Does Fractional Share Investing Work?
Your experience with investing in fractional shares will differ depending on which brokerage you decide to invest through. Each brokerage has its own guidelines, so finding out exactly what is offered will be important before deciding to invest.
- The list of stocks will differ from broker to broker, as well as whether it offers EFTs for fractional share investing.
- Some brokers charge additional fees for fractional shares.
- Some brokers may offer fractional share trading in real time, others may settle all fractional share trades in one or more large orders–which could affect share price, depending on how much the stock price fluctuated throughout the day between order time and trade execution time.
If you are only buying a fraction of a share, you will also only get a fraction of the dividend, if the stock receives one. For example, if you want to invest in a stock that is trading at $100 per share, you don’t need to have $100 to buy a full share, you can instead invest $25 and own one-fourth of a share. If this same stock happens to get a dividend that is $0.40 per share, you would likewise get one-fourth of the dividend, or $0.10.
One online brokerage to offer fractional shares is Charles Schwab. Schwab refers to a fractional share as a “slice.” When buying a Schwab stock slice, investors have the choice to buy slices of 30 stocks in companies on the S&P 500 in one transaction. These shares can then be held and sold independently. One way to think of it is like investing in a mutual fund, but you have the flexibility to trade the individual stocks, or stock fractions.
Are Fractional Shares a Good Idea?
Buying fractional shares can be beneficial in several ways: affordability, diversification, and dollar cost averaging.
Affordability: You don’t have to wait until you have hundreds or thousands of dollars in order to buy enough shares of a stock. You can start investing with many online brokerages in fractional shares with only $1.
Diversification: Investing lower dollar amounts and being able to diversify used to only be available in mutual funds. However, now that many brokerages offer fractional shares, investors can choose which companies they want to invest in, and can trade the fractional shares at any time—unlike a mutual fund, which is bought and sold as a “basket” of stocks. Having the option to only invest in a fractional share allows investors to choose several stocks rather than putting all of their money into just one company in order to purchase a certain amount of whole shares.
Dollar cost averaging: Because investing in fractional shares is an option, investors can choose to pick a specific dollar amount to invest each month, for instance. By investing on a regular basis, investors can take advantage of price fluctuations in the market while also hedging against risk.
Can You Buy Fractional Shares Through Fidelity?
Yes, you can buy fractional shares through Fidelity. With a minimum account balance of $0, and fractional share investing starting at only $1, Fidelity makes it easy to open an account and start investing in fractional shares. In fact, Investopedia ranks Fidelity as the Best Online Broker for ETFs, so if investing in fractional shares of ETFs is important to you, this company may be a great option. In all, Fidelity offers over 7,000 US stocks and ETFs in which investors can buy fractional shares.
Do Fractional Shares Make You Money?
Investing in such small dollar amounts may not seem like a way to make money. If you treat this like contributing to an IRA or 401k on a monthly basis, though, your multiple, small investments will add up over time and create a very nice savings account. While one individual purchase is only buying a portion of a stock, or portions of several stocks, investing over months or years will allow those fractional shares to keep building, potentially into several full shares of several stocks.
Can You Buy Exchange-Traded Funds (ETFs) as Fractional Shares?
Yes, some companies will offer ETFs as fractional shares. Because each brokerage has different fractional share offerings, it is important to find out if the firm you want to invest with offers ETFs as fractional shares and what other stocks are on its fractional share list.
Are Fractional Shares Harder to Sell?
The answer to this will depend upon how your brokerage handles the selling of fractional shares. Some brokerage firms do not guarantee liquidity of fractional shares. This will differ from broker to broker, so it is something to consider when choosing which firm you want to invest with. Liquidity refers to the ability to easily sell a stock or security and convert to cash. Even though you can buy fractional shares, you may not be able to sell fractional portions as easily as whole shares.
Investopedia. "Comparing Fractional Trading Offerings."
Charles Schwab. "Schwab Stock Slices."
Fidelity. "Where should you open your trading account?"
US Securities and Exchange Commission. "Fractional Share Investing – Buying a Slice Instead of the Whole Share."