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1 Share of Tesla or 25 of Nikola Stock? Why Investors Don't Have to Choose

By Rich Smith – Updated Jul 11, 2020 at 12:05PM

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Fractional stock investing is a popular but misleading term. In reality, all shares represent fractions of an entire company.

Barely a decade into production, Elon Musk's Tesla (TSLA 3.94%) is already basically the granddaddy of electric car stocks, the standard to which newcomers aspire. In contrast, Trevor Milton's Nikola (NKLA 7.97%) is the new kid on the block -- an electric truck IPO that more than doubled its stock price in just its first week of trading last month.

Even after rising so sharply since its IPO, Nikola stock still only costs about $56.50 a share, versus nearly $1,400 a share for Tesla. For the price of just one share of the best-known electric car stock on the block, you could buy 25 shares of the fast-growing upstart.

So which should you choose? Tesla or Nikola? Do you even have to choose at all?

Big man in a small car next to little man in a big car

With fractional stock investing, you don't have to worry about the size of a car stock's price anymore. Image source: Getty Images.

Good news for small investors

I won't bury the lede here: You don't have to choose, at least not anymore.

Maybe you'd prefer to own shares of profitable Tesla, which has earned nearly $265 million combined over its last three reported quarters -- but at $1,400 a pop, you can't afford to buy more than a share or two at its current price. Maybe you figure that, in order to own a respectable number of shares, you have to gamble on cheaper Nikola instead -- which has yet to sell even one electric truck, much less earn any profits on its sales, and which isn't expected to earn any profits before 2025 at the earliest (according to analysts polled by S&P Global Market Intelligence).

The good news is that now major discount brokers such as Charles Schwab and Fidelity have joined with Robinhood in offering fractional shares, so it's just as easy to buy $56.50 worth of a single $1,400-Tesla share (or roughly 0.04 of one share of Tesla) as it is to spend the same money to acquire one full share of Nikola.

Fractions make math easier

Fractional shares are precisely what they sound like -- fractions, or pieces of whole shares of a stock, carved out by a broker and sold off piecemeal. If you have as little as $5 to invest, Charles Schwab will permit you to use it to buy a piece of a share of stock (about a .004 share of Tesla, for example). Fidelity is even more flexible, permitting stock purchases in increments as small as .001 share (which in Tesla's case would cost you just a buck-forty).

And of course, should you be of a mind to, you could spend your money to acquire 1.0 share of Nikola stock -- or 1.001, or 1.004, really, any fraction you like.

Why buy fractional shares?

Of course, the question remains why you would want to buy fractional shares. First and most obviously, the answer is that fractional stock investing permits you to invest in shares that sell for face value prices big enough that you might not ordinarily be able to purchase even one of them -- Tesla is one example, at $1,400 a pop. Warren Buffett's famed Berkshire Hathaway (BRK.A 1.71%) would be an even more extreme example, selling for a share price of ... $268,780. Each.

There are, however, other reasons to consider fractional stock investing. Perhaps the most important reason for novice investors, I think, is that fractional stock investing drives home the fact that all shares are in fact "fractions." Nikola, for example, divides its $14.5 billion market capitalization among 360.9 million shares outstanding. Meanwhile, Tesla divides its much larger $258 billion market cap among many fewer shares -- 185.5 million shares to be precise. Thus, each "whole" share of Tesla in fact represents a 1/185.5 millionth share of the company.

"Half a share of Tesla," accordingly, is just a smaller fraction of the entire company: 1/371 millionth to be precise. For that matter, 1/25th of a share of Tesla (0.04 share, or $56.50-worth) can be just as accurately described as 1/4.6375 billionth of Tesla in its entirety.

When you look at it this way, there really isn't much qualitative difference between buying a whole fraction, or a fraction of a fraction of Tesla. What matters is the quality of the business you are buying, no matter how small a fraction of that business you buy.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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