Please ensure Javascript is enabled for purposes of website accessibility

The Secret to Buying Google and Other S&P 500 Stocks as a New Investor

By Christy Bieber - May 16, 2020 at 6:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Fractional shares are the secret to buying Alphabet stock and other S&P 500 companies if you only have a three-figure portfolio.

For many new investors, buying companies listed in the S&P 500 is a good place to start. This market index comprises 500 of the largest companies trading on the New York Stock Exchange and Nasdaq, and investing in large companies is generally seen as less risky.

But many of the best-known companies in the S&P 500 come with a very high share price. For example, Google parent Alphabet (GOOG -3.47%), (GOOGL -3.30%) had a share price topping $1,300 as of May 15; Amazon.com (AMZN -5.14%) was priced at more than $2,400 for a single share. 

While investors can gain exposure to the stocks on the S&P by purchasing an exchange-traded fund (ETF) tracking the index, a share of most of these ETFs will also set you back several hundred dollars. For those just getting started, it could take months to save enough to buy just one share of an S&P index fund, and even longer to buy shares of the best-known companies among the 500. And sinking so much cash into a single investment can make it difficult to build a diversified portfolio. 

But you don't need thousands of dollars to buy shares in companies that are household names. An increasing number of online brokerage firms, including major brokers such as Schwab, are offering fractional shares, which allows investors to buy even smaller slices of a company and lowers the cost of entry dramatically. 

A full pepperoni pizza with two hands each taking away one slice.

Image source: Getty Images

Why fractional shares could be the key to investing in expensive stocks

Fractional shares make it possible to buy a portion of a share of a company like Alphabet, Amazon, or Berkshire Hathaway (BRK.A -1.32%) (BRK.B -1.63%). You can also buy partial shares of exchange-traded funds, such as the SPDR S&P 500 Trust (SPY -2.04%), which is designed to track the S&P 500

With some brokerage firms, you can buy as little as 0.001 of a share, so a small ownership stake in a company with a $1,300 valuation would cost you as little as $1.30. 

While buying such a small portion of a company may not seem like it would do much for you, you'll earn the same percentage on your investment as any other investor with full shares.

Say, for example, one year ago on May 14, 2019, you had $100 to invest, so you purchased some fractional shares of Alphabet. The stock was selling for $1,137.21 per share, so that would've bought you around 0.087 of a share. Today, that $100 investment would be worth around $120. You would have made $20 while a full share owner would have made around $232 -- but you'd both have earned the same return (around 20%) on your invested funds. 

Should you buy fractional shares?

With so many brokers offering fractional shares, purchasing them is easier than ever. Many discount online brokers have also eliminated commissions, which has made it more practical to invest small sums of money and still earn a reasonable rate of return without trading fees taking too big of a bite. With these recent changes, it's much easier for beginning investors to put their money to work. 

For a starting investor with a small balance (say, $1,500), buying a single share of Alphabet would leave little or nothing left to diversify across other companies. Rather than tying the performance of your entire portfolio to one stock, you could invest that $1,500 across fractional shares of several companies, thereby reducing risk. 

It's important to remember, though, that a high share price doesn't necessarily correlate with a high value. Whether you're buying Alphabet, Amazon, or any other stock, it's essential to research the fundamentals of the company and invest only if you think the business is likely to perform well over the long term. 

If you've done your research, there's little reason not to dive in and purchase fractional shares. They enable you to build a diversified portfolio of companies you love but couldn't otherwise afford to invest in. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,240.15 (-3.30%) $-76.52
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,251.43 (-3.47%) $-81.02
SPDR S&P 500 ETF Trust Stock Quote
SPDR S&P 500 ETF Trust
SPY
$380.65 (-2.04%) $-7.94
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$412,170.01 (-1.32%) $-5,529.99
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$273.86 (-1.63%) $-4.54
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$107.40 (-5.14%) $-5.82

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
332%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.