There's a lot of legwork that goes into vetting individual stocks. You need to check each company's cash flow, figure out what its competitive advantage entails, and determine how much long-term growth potential it has.
What if you do all that work only to determine that the stocks you really want to buy are out of reach financially? If you have your eyes on a few specific companies whose price tags are too high for your investing budget, there may be a way to snag them anyway: fractional shares.
How fractional investing works
Fractional investing is not a new concept. In the past, it was common to wind up with fractional shares of stock (meaning, a portion of a share, as opposed to a full share) after a stock split. But now you can specifically go out and buy a fraction of a share of a company, whether you can't swing an entire share or simply want to spread your money around differently.
Here's how it works: Say you're looking at a stock that's trading for $1,000 a share, but you only have $250 to invest. In the past, you'd have to choose a different stock. Now, you can buy a fraction of a share of that stock and enjoy all of the benefits that come with holding it. If share prices increase and you sell your fractional share, you'll see gains that proportionate to the amount of that stock you hold (for example, if a company's share price increases $10 and you own a quarter of a share, you make $2.50 if you sell). Similarly, if you own fractional shares of a stock that pays dividends, you'll get a proportionate dividend payment.
Is there a downside to buying fractional shares?
Fractional shares carry the same risk as traditional stock investing. There's always a chance that your stocks could lose value, or a company could cut its dividend. Still, owning fractional shares could limit your losses in the event that a company's stock price falls because your loss is only proportionate to the fraction of those shares that you own.
Furthermore, fractional shares let you build a diverse portfolio on a limited budget. Diversity is the key to accumulating wealth and limiting losses in the event of a stock market crash.
How to buy fractional shares
Many brokerage firms offer fractional shares, so whether you'll have that option will depend on your brokerage and its rules. Some brokerages set a minimum share of a stock you can buy, and some brokerages won't let you buy fractional shares of just any stock. For example, you may be limited to stocks that are part of the S&P 500. Generally speaking, the process of buying fractional shares is similar to that of regular shares: You decide how much of a stock you want to buy, and then initiate the trade.
Of course, just because fractional shares are more affordable than traditional shares doesn't mean you should be lax in your research. You should still vet the companies whose shares you're buying, even if you're only buying quarter shares instead of full shares. If you're on a limited budget, don't let that stop you from loading up on the stocks you feel best align with your investing strategy.