Amazon (AMZN -1.14%) is trading at more than $3,000 per share, which creates problems for many investors. For some, a single share might cost more than their entire account balance. The majority of people under 50 do not have enough capital saved in brokerage accounts to efficiently manage the portfolio weight of Amazon. On the other hand, even if you do have sufficient funds to buy one or two shares of Amazon, having to buy whole shares could leave you with more or less invested in the stock than you'd like.
Luckily, fractional shares, which are now offered by most large brokerage platforms, can provide the same accessibility as penny stocks while allowing investors to invest in high-quality businesses and avoid many of the downsides of penny-stock trading.
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Excellent tools for diversification
Popular brokers have introduced new features to improve their services and attract clients, and fractional shares are among these innovations. Investors have traditionally dictated the number of shares and an acceptable price in order to execute a stock transaction. However, it has become increasingly popular to allow investors to instead dictate a dollar amount with which to buy or sell a stock. Brokers accomplish this by allowing their clients to trade fractions of shares.
Each brokerage has its own rules and methodology for delivering this service, so investigate specifics before making any decisions. Criteria such as minimum investment vary from platform to platform. Robinhood users, for example, can purchase as little as 1/1,000,000 of a share with a $1 minimum. If you have $100 to invest on Robinhood, and you'd like Amazon to comprise 10% of your portfolio, you can purchase $10 worth of that stock.
Index-tracking ETFs and mutual funds became popular because they provide diversified exposure in smaller dollar amounts. Proper use of fractional shares captures that major benefit but with even more flexibility and potentially lower expenses. However, investors seeking to replace ETFs with fractional shares should be aware of the rebalancing required to mimic a professionally managed fund.
Fractional shares aren't penny stocks
Penny stocks are very cheap shares of companies that are often not listed on major exchanges. They are frequently smaller businesses that receive less attention from the media and the investing public, they often operate under less stringent governance standards, and they aren't held to the same standard as stocks on major exchanges.
Not all penny stocks are shares of bad companies, but they are more prone to volatility -- and even foul play in extreme cases. There are undoubtedly some penny stock-trading success stories out there, but individual investors should generally avoid this area.
In this regard, fractional shares are different from penny stocks. They don't have the same high-risk, high-reward profile that can propel astronomical returns, because they are bound by the same market dynamics as normal shares. That should be fine for the vast majority of individual investors. Amazon equity provides higher volatility and upside than the market, and you only need $1 to invest in it.
