Investing in the stock market is a fantastic way to build wealth, especially as you're saving for retirement. But it can also get expensive quickly. Some stocks are valued at hundreds or even thousands of dollars per share, and if you're investing in a dozen or so different stocks to properly diversify your portfolio, you could easily end up investing several thousand dollars or more.
Not everyone has that kind of cash lying around to invest, especially right now when money is tight for millions of American households. However, there is one way to invest in big-name stocks at an affordable price, making it easier to invest regardless of your budget.
A more affordable investment option
Investing in major companies doesn't have to break the bank. In fact, you can invest in big-name brands for just a few dollars by investing in fractional shares.
Fractional shares are just what they sound like -- partial shares of a company's stock. While a full share of stock may cost hundreds or thousands of dollars, investing in a fractional share of stock can cost as little as one dollar.
There are a number of benefits of investing in fractional shares, the most significant being the low cost. If you've got your eye on a few companies but can't afford to buy full shares of stock, fractional shares make it much more affordable to jump into the stock market. Or if you're a new investor and just want to get your feet wet without investing a large sum of money, you can test the waters with fractional shares.
Another advantage is that it's easier to diversify your investment portfolio with fractional shares. To limit as much risk as possible, it's wise to invest in at least 10 to 15 different companies. That can be incredibly expensive if you're buying full shares, but fractional shares make it much more affordable to invest in dozens of different stocks.
Things to watch out for
Although fractional shares certainly have their bright spots, like any investment, there are potential risks involved, too. For one, fees can potentially take a large bite of your earnings. Some brokerages may charge per transaction, and if you're making dozens of transactions that cost only a few dollars each, those fees can add up quickly.
In addition, not all brokerages allow you to transfer fractional shares. So if you start investing through one broker and then decide to switch, you may need to sell your fractional shares and then reinvest with your new broker. Depending on how long it takes to reinvest, your stocks could increase or decrease in value while you're in between brokers.
Another potential downside is that not all stocks are available for fractional investing. Different brokerages also have different rules, and not all of them allow investors to buy fractional shares. Before you dive in, compare brokerages to find one that allows it, then make sure the stocks you have your eye on are available as fractional shares.
How to get started
The first step is to choose the right broker. Major brokerages such as Fidelity and Charles Schwab offer fractional investing, as do a few robo-advisors, including Betterment and Acorns. Online brokers such as Robinhood and Stash also allow investors to buy fractional shares.
Again, each broker may have different rules regarding how and where you're able to invest. Charles Schwab, for instance, only allows investors to buy fractional shares of companies that are listed in the S&P 500, while Robinhood only allows fractional investing for companies with a market capitalization over $25 million. So before you sign up, make sure the companies you want to invest in are available through the broker you choose.
Fractional shares can be a smart way to invest without breaking the bank, especially if you have your sights set on investing in companies with high stock prices. By going the fractional investing route, you can invest in major brands and easily diversify your portfolio while saving money at the same time.