Moderna (MRNA -0.24%) has been at the very forefront of vaccine development and its stock has shown no restraint: The company's common shares have risen nearly 500% over the past 12 months. Moderna currently trades at about $140 per share, up from around $30 a year ago, and its revenue has far surpassed analyst expectations in recent quarters. The stock was up 800% at one point.
Given its meteoric stock price rise, interest in the company has skyrocketed. Many average investors now want a piece of the company, although investing in stocks with high share prices has been historically problematic for people without large amounts of money to invest.
Fortunately, fractional shares are now available. This allows people to invest in virtually any company without the need to buy whole shares. This means when you want to invest $500, you actually get to invest the entire amount -- not an arbitrary amount dictated by the price at which the company happens to be currently trading.
The old problem
Until recent years, stocks with moderately high prices (say, over $100 per share) might have been out of reach for many everyday investors. Previously, if you had $500 to invest, and you wanted to buy Moderna at its current price of $140 per share, you'd be able to buy three shares and nothing more. The remainder, about $80, would sit in cash in your investment account, earning minimal interest and losing value to inflation. Hopefully, when you had more money to invest, you'd be able to buy more shares.
Why fractional shares matter
One reason that fractional shares are so important is that they allow beginner investors, or those without much capital to invest, to become part of the equity marketplace. Many stocks are far more expensive than Moderna, but they are now just as accessible to the average person as they are to the millionaire.
The second reason fractional shares matter is that you can put every one of your hard-earned dollars to work. Continuing the previous example, with fractional shares enabled, your $500 would buy 3.571 shares of Moderna stock. No dollar would be left on the sideline, and there's no need to wait until you've saved more money to buy more.
Fractional shares, through this lens, provide a medium for you to keep more money invested and earn higher dollar returns than if your money were to stay in cash.
In the specific case of Moderna, you now don't need even $100 to own a share of stock -- as it happens, you can get started with as little as $5. If the stock were to rise 50% in the next year, you'd earn the same percentage return regardless of your holding size. The idea is that you can access Moderna without the full cost of a single share in cash.
Are fractional shares penny stocks?
Fractional shares really only have one thing in common with penny stocks: Almost anyone can buy them. Investing in fractional shares of corporations that drive the S&P 500 is a wholly different exercise than investing in penny stocks, which often come with illiquid trading and uncertain fundamentals. Fractional shares simply allow you to gain access to great companies that would otherwise be out of reach, while penny stocks tend to be cheap and volatile.
Where to buy fractional shares
Fractional shares are available at many of the major brokerages, but are most commonly advertised by Schwab and Fidelity as "Stock Slices" and "Stocks by the Slice," respectively. This means that you can functionally ignore stock prices, and focus more on the companies in which you want to invest and the amount you're able to save.
Vanguard doesn't participate in fractional share trading on its ETF platform, but if you choose to invest in Vanguard mutual funds, you'll be able to invest as much or as little as you'd like once you've hit the minimum asset requirements.
Fractional shares: A win for the small investor
Anyone who's ever felt frustration about not being able to own a particular stock -- or about not being able to have all of their money invested -- will welcome the obvious improvement to allow fractional share trading. You can now trade freely based on the companies you want to own without regard to their underlying stock prices. Furthermore, you know every dollar can be immediately invested. It's one step closer to a more democratized equity marketplace where everyone can participate -- not just those with a lot of spare cash.