It takes more than a global pandemic to slow Apple (NASDAQ:AAPL) down. In its fourth fiscal quarter of 2020, the iPhone maker posted record revenue of nearly $65 billion -- despite the delay of the iPhone 12 launch until November. The company also set new records for revenue and earnings per share in its third quarter. Investors have rewarded Apple for its performance, driving the share price up nearly 70% for the year.
Given Apple's record setting year, it seems crazy that you could buy into the tech giant for only $1. If you pull up Apple's current share price online, you'll see that it's trading in excess of $125 per share, and that's after a four-for-one stock split in August. Even so, you can get Apple in your portfolio for as little as $1 by purchasing fractional shares.
What are fractional shares?
Fractional shares are stock buys in units of less than one. If you don't have the cash for a whole share, you could buy one-half a share for one-half the price. In Apple's case, one-half a share would set you back about $62. But fractional shares are not limited to halves, quarters, or even eighths. If you wanted to buy a fraction of Apple for $1, you could. Assuming a $125 share price, that would get you 0.008 shares.
Fractional investing has only recently made its way into the mainstream. Not long ago, if you wanted to buy fractional shares, you had to do it through an investing app like Betterment or Acorns. But in 2020, two major brokerages -- Fidelity and Schwab -- both began supporting fractional transactions.
Fidelity calls its fractional program "Stocks by the Slice" and Schwab’s offer is called "Schwab Stock Slices." If you have a Fidelity account, you can buy more than 7,000 U.S. stocks and ETFs for as little as $1 each. With Schwab, you can purchase any S&P 500 company with a minimum buy of $5.
How to buy fractional shares
As you may have guessed by now, you can't buy fractional shares on the open market. You have to work through a brokerage that specifically offers fractional investing. Keep in the mind that the broker does the work behind the scenes to facilitate these transactions. You can think of it this way: If you and someone else place an order for one-half a share of Apple, your broker buys a whole share and allocates half to each of you.
This means that certain details about fractional investing will vary from broker to broker. Those details might include how long it takes to settle your transactions and whether or not you get voting rights as a fractional shareholder. It also means you can't transfer your fractional shares to another brokerage. If you switched brokerages, you'd have to sell your fractional shares and move the money in cash.
You buy dollar amounts, not share counts
When you place a traditional stock order, you specify the number of shares you want along with the price. The total value of the transaction is then calculated by multiplying those two data points. With fractional shares, you pick your stock and state the dollar amount you want to spend. The number of shares you get is calculated as your investment amount (say, $1) divided by the stock's current share price. You're basically saying, "Give me $1 worth of Apple" instead of "Give me one share of Apple." This is why fractional investing is also sometimes called dollar-based investing.
Building wealth with fractional shares
It's great that you can buy Apple for $1, but here's the real question: Can you get rich with fractional shares? That's hard to answer definitively, only because rich is a subjective word. But you can definitely get richer with fractional investing. It's a low-risk starting point when you don't want to dump several thousand dollars into the stock market at the get-go.
The trick to building wealth with fractional shares is to increase the dollar value of your purchases over time. Investing $5 weekly is better than nothing, but that won't make you rich in your lifetime. Bump up your weekly buy to $50, though, and the outlook gets better. At that rate, you can build a six-figure portfolio in 20 years -- assuming your stocks are growing in line with the market at 7% annually. Even when you're spending $50 at a time, you still need to buy in fractions to own high-quality companies like Apple, Alphabet (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), and Facebook (NASDAQ:FB).
Take the first step
Fractional investing is appealing because you don't have to save up to start investing. You can invest right now in high quality companies -- with little more than the spare change hiding in your couch cushions. That's the first step to building wealth. The second step is to stick with it. You'll see the momentum build soon enough.