It's been a heck of a year for Tesla (TSLA 3.11%). The electric vehicle (EV) manufacturer reported four consecutive quarters of profitability for the first time, outperformed analysts' expectations in the third quarter by a long shot, and received the nod for inclusion into the S&P 500. The carmaker also stands to benefit from President-elect Biden's plan to build out EV charging stations and generally promote clean energy in the U.S.
Oh, and Tesla stock was up 562% since Jan. 1 as of the Nov. 24 close, amid a global pandemic no less.
There's good news here for novice investors, though. Even as Tesla's share price climbs above $550, you can still own a piece of the company for just $1. All you need is a brokerage account that supports fractional investing.
Fractional investing defined
Fractional investing is the practice of buying stock shares in units of less than one, for a proportionally smaller price tag. One-half of a share would cost you 50% of the current stock price, for example, and one-quarter would cost 25%. In the case of Tesla, assuming a current stock price of $550, a half-share would cost $275. One-quarter of a share would be $137.50.
The fractions can get much smaller than one-quarter or one-half. Robinhood, an app-based brokerage, allows you to buy shares in units as small as one-millionth of one share with as little as $1. That means you could invest a single dollar in Tesla, which would buy you about 0.001 of a share.
Your brokerage sets the rules
Before you dive into fractional investing, it's important to know your brokerage's rules of play. You can't buy fractional shares directly from a stock exchange, and neither can your brokerage. The brokerage makes fractional investing possible by purchasing the shares in whole units and divvying them up according to their customers. That's a workable system, but it adds some nuances to the investing process.
For one, the brokerage decides whether you get shareholder voting rights with your fractional ownership. Robinhood does allow you to have votes according to the shares (or fractions of shares) you own. But Stash, another app-based brokerage, only counts your vote if you own at least one full share of the stock. That means you can vote with 1.5 shares in your portfolio, but not with 0.75 shares.
Other details that vary by brokerage are the positions available for fractional investing and the minimum investment amount. Robinhood, for example, allows for fractional purchases of most stocks that are priced over $1 and have a market capitalization of $25 million or more. Schwab, on the other hand, only allows fractional buys on S&P 500 stocks.
The minimum investment is $1 on Robinhood, but $5 with Schwab. Stash allows you to invest any dollar amount, but you need at least $5 to open an account.
Check with your brokerage on the rules that will apply to you. Beyond voting rights, minimum-buy amounts, and which securities you can purchase fractionally, you also want to know how quickly your buy and sell orders are fulfilled and whether you'll be charged fees on transactions.
Investing basics still apply
Fractional investing makes it possible to own a piece of the market's most popular companies on the tiniest of investing budgets. That's a good thing, as long as it doesn't lure you into bad habits. Investing basics still apply, even when you're dealing with small dollar amounts.
Said another way, buy Tesla because you researched the company and you believe it has staying power -- not because it feels trendy and it only costs $1. While you're at it, pick another 19 or 20 companies to round out your portfolio. It'll be well worth the $20 you spend. Tesla hasn't disappointed investors too much this year, but you don't know when that could change. Diversifying into other stocks spreads out your risk, which becomes increasingly important as your wealth grows.