Shopify (NYSE:SHOP) was a clear winner from shutdown orders that shuttered businesses around the globe. In the early days of the pandemic, between March 13, 2020, and April 24, 2020, the number of new stores using the Canadian e-commerce platform's tools soared by 62%.
Though fourth-quarter earnings haven't been announced yet, by virtually every other metric, 2020 was a banner year for Shopify. In the third quarter, total revenue was up 96% from the same quarter in 2019. Gross profits were up 87%. While that momentum may slow down a tad, there are plenty of reasons to think it will be a winning growth stock, with an estimated total addressable market of $78 billion.
But Shopify shares are expensive for beginning investors. In the past year, they've surged 155% to just under $1,200 as of Jan. 22.
The good news, though, is that investors who don't have much money are no longer relegated to cheap stocks. Through fractional shares, you can easily invest in companies like Shopify, even if you aren't ready to pony up the price for a single share.
Shopify fractional shares vs. penny stocks
Fractional shares work exactly as the name suggests: You buy a fraction of a share instead of an entire one. It lets you specify how much you want to invest in a stock, rather than investing in multiples of the share price. If you wanted to buy Shopify stock but wanted to limit your investment to $100, you'd get about 1/12 of a share based on the current price of just below $1,200. Not all brokerages offer fractional shares, but those that do often let you get started with as little as $5.
That low entry point makes it easy to confuse fractional shares with penny stocks, which are simply dirt cheap stocks. But penny stock investors often get exactly what they pay for. The businesses behind them are often troubled and/or unproven. Penny stock scams are extraordinarily common. When you invest in penny stocks, there's a very good chance that you'll lose everything you invested.
Should you buy fractional shares?
There are plenty of online brokers that offer fractional shares, including Robinhood, Fidelity, and Charles Schwab. But if you're a beginning investor, consider putting your money toward S&P 500 index funds before you invest in fractional shares of Shopify or any other company. You'll get a diversified portfolio, which you want to build before you invest in individual stocks, whether you're buying regular or fractional shares.
Keep in mind that your investment risk is the same with fractional shares as with any other investment. In other words, if share prices drop by 20%, your shares still lose 20% of their value, regardless of whether you own full shares or fractional shares. So only buy fractional shares of Shopify or any other company if you can accept the level of risk.
In general, fractional shares are a much better choice than penny stocks. They let you buy stocks like Shopify for penny stock prices -- without taking penny stock risks.