Even after a 4-for-1 stock split, Apple (NASDAQ:AAPL) is trading at over $120 per share in October. That's not an astronomical price tag, but it's high enough to be out of reach for many novice investors who want a piece of the iPhone maker. Fortunately, there is a work-around. It's called fractional investing, and you can use it to buy into Apple for less than $1.
Fractional investing is the practice of buying stock or fund shares in units of less than one. If you wanted to own Apple, for example, you could invest $15 for about 0.125 shares -- instead of handing over $120 for a whole single share.
Your fractional share position would function much like any other stock holding. Its value would move up and down with the stock price, your share count would be proportionally affected by any stock splits, and you'd earn fractional dividends. Your 0.125 shares of Apple might be worth $15 today and $15.50 tomorrow, for example. And if you had owned the 0.125 shares before the 4-for-1 Apple stock split earlier this year, your share count would have increased fourfold to 0.5 shares after the split. Going forward, based on that share count, you'd be entitled to 50% of the tech giant's next dividend.
Brokerages make the rules
Fractional investing is made possible by your brokerage rather than the actual stock exchange. Brokerages that offer fractional investing have to purchase shares in whole units and then divvy them up in fractional pieces as customers request them. Since the brokerage manages the process, the brokerage gets to set the rules. And that means certain aspects of fractional investing will vary based on which brokerage you use.
Generally, brokerages do not charge commissions or trading fees on fractional buys, but the similarities often end there. Four areas to clarify with your prospective fractional investing broker are minimum buys, stock selection, voting rights, and liquidity.
Minimum dollar amounts on fractional buys can range from $0.01 to $5. Investing app Stash has no minimum buy-in on shares priced at $1,000 or less, though you do have to spend at least $0.05 if the share price is $1,000 or greater. Fidelity and Robinhood allow you to make fractional purchases with as little as $1, which would get you about 0.008 shares of Apple. Charles Schwab's minimum buy is $5.
Your choice of stocks will differ by brokerage, too. Schwab offers fractional shares only for companies in the S&P 500 index. That's not an issue if you're investing in Apple, but it's deal breaker if you want fractional shares of Tesla, which is not currently part of the S&P 500. Other brokerages have broader catalogs available. Fidelity allows fractional buys on 7,000 different stocks and exchange-traded funds (ETFs), while Stash maintains a browsable directory of 100s of stocks and ETFs that you can buy fractionally.
Your fractional position may or may not come with shareholder voting rights. Robinhood, for example, allows you voting rights based on your percentage ownership. But Stash gives you proportional voting rights only if you own at least one full share. That means you can vote if you own 1.1 shares of Apple, but not if your share count is 0.5.
Your fractional shares may have less liquidity, too. The brokerage manages the aggregate fractional shares owned by its customers, and it benefits from keeping that cumulative share count as close to a whole number as possible. That could mean delays in having your orders filled if the brokerage waits for fractional orders to net out near a whole number. Alternatively, your brokerage may charge you to sell your fractional shares, a practice followed by Schwab.
Also, you likely can't transfer your fractional shares to another brokerage. You'd have to sell first and then transfer the cash.
Remember to diversify
Buying a fractional position in Apple for $5 is a safer move than purchasing whole shares of a downtrodden penny stock for the same amount. But it's not so safe that you can overlook the importance of diversification. If you're going to invest in individual stocks even fractionally, look to build a portfolio with at least 20 different positions. That way, you only have 5% of your money tied up in any single company.
If 20 individual positions blows your investment budget, consider fractional shares of an ETF instead. Any S&P 500 ETF, such as Vanguard S&P 500 ETF, will give you a slice of Apple, along with some 500 other companies that make up the index. That's instant diversification across the largest public companies in the country -- for the price of a penny stock.
Invest on a budget, wisely
Fractional shares can be your ticket to investing on a budget. Set yourself up for success by clarifying the rules at your brokerage first and then taking steps to diversify even your tiniest positions.