If you're an investor or you hope to become one, you need to know about fractional shares. Fractional shares are partial shares of a company's stock: Instead of owning one or more full shares of the stock, you own a fraction of one. In the past, investors generally would end up with fractional shares only after a stock split since brokers only allowed the purchase of full shares. But that's changing now as big-name brokers make it possible to purchase fractional shares directly.
Thanks to this shift, you can specify how much money you want to invest in a particular company (rather than how many shares you want to buy) and buy a small portion of a share if your cash investment isn't enough for a full one. Fractional shares have big benefits for investors, and there are three key reasons you should seriously think about adding them as an investment option.
1. You start investing with very little money
Traditionally, investing in stocks was an expensive proposition. Most brokerage firms had minimum balance requirements, you had to pay a commission to buy or sell a stock, and you were limited to purchasing full shares of any stock you wanted.
Fractional shares, combined with other changes such as commission-free trading, have significantly lowered the barriers to entry. Now, you can literally get started investing with pennies. While Charles Schwab (NYSE:SCHW) allows you to buy fractional shares worth $5 or more, Fidelity lets you buy as little as 0.001 of a share as long as your transaction totals at least $0.01.
Since you don't need much money to get started, anyone can do it. If you have a spare dollar or two, you can begin building a portfolio that will allow you to earn the same percentage gains as any other investor with money in the market.
2. You can buy into expensive companies you couldn't otherwise afford
Investors with little money were often limited to penny stocks before. These equities are usually companies you've never heard of that are high risk and often very poor investments.
But thanks to fractional shares, you can buy a piece of any publicly traded business, including some of the biggest companies in the United States that trade for thousands of dollars a share.
Want to buy into Amazon.com (NASDAQ:AMZN), which closed at $2,421.86 a share on Tuesday? Or Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG), the parent company of Google, with a closing price of $1,421.37 a share that same day? Or Netflix (NASDAQ:NFLX) which would set you back $414.77 for a full share? No problem. With fractional shares, you enter your trade by the dollar amount you have available and get your own portion of a share. A $10 investment would get you 0.004 of a share of Amazon, or 0.007 of your piece of Alphabet or 0.024 of a Netflix share.
There's no company out of reach with fractional shares, which means you can make investment decisions not based on the amount of cash you have available but on which companies you believe have the best chance of performing well over the long term.
3. You can more easily diversify your portfolio with very little cash
With fractional shares, you don't need as much money to buy stocks you want, so it's easier to spread your cash around.
If you wanted to buy into Amazon, Alphabet, and Netflix, for example, you could do so with only a few dollars instead of having to spend more than $4,200 just to get a single share of each of these three stocks.
Diversification reduces the risk of investing because if you buy into lots of different companies in different sectors of the economy, you stand a better chance of having some of your investments perform well if others perform poorly.
And since fractional shares enable you to buy multiple investments with just a few dollars, you can build a diversified portfolio right away even if you don't have several thousand dollars to split up among different stocks or index funds.
Consider adding fractional shares to your portfolio
Whether you're just getting started investing with very little cash or you want to use your money wisely to build a diversified portfolio, there's a good chance fractional shares can help you. Consider adding some to your portfolio today if your broker is offering them. Or invest with a brokerage firm that makes buying them possible if your current broker hasn't yet jumped on the bandwagon.