The increased use of fractional shares in stock trading has created a unique investment opportunity, perfect for both beginners and seasoned investors. As their name suggests, this trading option allows you to buy a fraction of a stock share rather than full shares only.
If you want to take advantage of affordable diversification, buy into stocks with a high share price, or try out new investment techniques without putting a ton of money at risk, fractional shares offer that option. Here are four simple steps you can take to start investing in them.
Image source: Getty Images.
1. Find a brokerage offering fractional shares
While you were once relegated to small, untested brokerages if you wanted to trade fractional shares, that's no longer the case. But although a growing number of brokers offer fractional shares, not all do. Some of your options include Charles Schwab, Fidelity, Robinhood, and Square.
Since you have a wealth of choices, research your brokerage carefully. Most now offer commission-free trading along with the chance to buy fractional shares. You'll also want to check what types of investments the brokerage offers, its reputation for quality service, and the minimum transaction amount needed for fractional shares since some have higher minimums than others.
2. Deposit a small amount (as little as $5 would work)
Once you've opened a brokerage account, it's time to deposit money to invest.
The great news is that most brokers have abandoned minimum-deposit requirements for opening an account so you don't need much money to get started. And thanks to fractional shares, you also don't need a lot of money to buy stocks. In fact, Schwab will let you buy partial shares with as little as $5, and Fidelity's limit is even lower.
It may not seem worth it to invest with just a few dollars, but every little bit helps. If you regularly deposit small sums when you get spare cash, they'll eventually start adding up -- especially if you're making wise investments and earning a good return.
3. Research stocks or index funds you want to buy
Once you've got your money with your broker, it's time to do the important part: selecting what you want to invest in. And you have a few options.
The simplest and easiest approach is to buy exchange-traded funds. There are some, such as the Vanguard Total Stock Market ETF (VTI 1.19%), that track the performance of the market as a whole, but you can also opt for thematic ETFs if you want to invest in a particular industry such as robotics or cannabis. ETFs are easy to buy because you don't have to research and select individual companies. Your money is pooled with that of other investors and put into a diverse array of assets that track a particular index or industry.
ETFs generally come with low fees, and thanks to fractional shares, you need very little money even to purchase expensive ones such as the SPDR S&P 500 ETF (SPY 1.19%), which tracks the performance of the S&P 500 and is currently trading at over $334 a share. But the downside is, you're limiting your gains. If you want to take on more risk for the potential for a greater reward, you'll need to research companies and buy shares of individual stocks instead.
The ability to buy shares of any stock you want is one of the greatest things about fractional shares, because you're no longer locked out of owning a part of big companies with high share prices, such as Tesla (TSLA 1.85%) at over $1,452 a share or Amazon (AMZN 1.30%) at over $3,167 per share. You can choose investments based on which you feel have the best potential without restricting yourself to cheaper (and often unproven) upstarts.
Few people are able to consistently beat the market by buying individual stocks, which is why investing legend Warren Buffett recommends most investors stick with index funds. But if you're willing to put in the time and energy to learn how to invest wisely, you could be richly rewarded. Fortunately, there are plenty of guides to picking stocks that can help you get started. And with fractional shares, you don't have to put a lot of money at risk while you're learning.
4. Use dollar-based investing to purchase shares
Finally, after you've found the ETFs or companies you're interested in investing in, place your order at your brokerage.
Investing with fractional shares is also called dollar-based investing because you specify the amount you wish to invest in each company rather than the number of shares to buy. So if you're planning to purchase $100 of Amazon stock because that's all the money you have to invest, just enter $100 into your order form to buy around 0.032 of a share. While this doesn't sound like much, if the stock performs well, your percentage gains will be identical to those earned by all other investors.
It's not often that there's a major change in the investing landscape, but with a growing number of brokers offering fractional shares, here's a revolutionary opportunity for everyday investors to buy stocks they couldn't afford before.
