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Why Fractional Shares Are Ideal for First-Time Investors

By Christy Bieber – Jun 20, 2020 at 11:18AM

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You should be investing in them!

If you're thinking about starting to invest for the first time, taking that first step can seem daunting. After all, investing carries risk and you'll be putting your money into the market during a volatile time.

There's some good news, though. There's never a bad time to start investing for the first time. And starting now means you've got a great opportunity most first-time investors before you didn't have: You can invest in fractional shares.

Fractional shares are now offered by several major brokers, and they allow you to buy just a part of a share, while before you were limited to buying full shares only.

With fractional shares, you specify the dollar amount you want to invest in a stock and can buy as many shares as your money allows for, even if that's just part of one. This is an ideal way for first-time investors to get money into the market for three key reasons. 

Man with coins stacked up next to piggy bank.

Image source: Getty Images.

You can get your feet wet and learn how to pick stocks without risking a fortune

With fractional shares, you only have to risk a few dollars on each stock you pick. In fact, Charles Schwab will let you buy a partial share of any stock on the S&P 500 for only $5, while Fidelity allows the purchase of as little as .001 a share, even if that means your transaction value is only a penny. 

With such a low cost of entry, you can try out different investment strategies until you learn what works for you without risking a fortune.

You can spread your money around to reduce risk as you're learning how to invest

Traditionally, if you wanted to invest in an expensive stock, you'd end up spending hundreds or even thousands of dollars to buy a single share. This meant you might have to put most or all of your money into one company if you thought it would perform well and wanted to get in. And if that company performed poorly, it would take your whole investment portfolio down with it.

But that's not the case any longer. Now, you can put a few dollars on a whole bunch of different companies (even expensive ones) across different sectors of the market without putting thousands of dollars at risk to do so.

By spreading your money around, you increase the chances you'll make at least some good picks in your portfolio and will significantly reduce your risk. 

You can get started even if you don't yet have a lot of money

In the past, you'd usually need to amass a good amount of money if you wanted to start investing, especially if you didn't want to be really limited in the investments you bought. Most brokerages had minimum balance requirements, and even those that didn't would limit you to buying full shares and charge you a commission to do it.

Major brokers have now done away with those barriers to entry, and enabling the purchase of fractional shares is one of the key ways they did it. You can get started investing with only a few dollars now and can build a diversified portfolio of stocks with as little as $10 or $20, so you don't have to save a lot before you jump in. 

Start investing in fractional shares today

Buying fractional shares requires the same commitment to sound investing principles as purchasing any other stocks.

But if you're ready to do the work to research companies that are likely to do well over the long term, fractional shares present great opportunities. If you've got even a little bit of money, start buying some today so you can take your first important wealth-building step. 

Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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