When it comes to spending money, a higher price tag doesn't always mean higher value. But sometimes, it can.
If you spend extra money on quality running shoes, for example, they might last more miles than a cheaper pair of sneakers. And if you pay for a high-end laptop, it might work longer and operate faster than an inexpensive laptop with fewer features.
The same can hold true when it comes to buying stocks. Though there are plenty of great companies out there with inexpensive share prices, in some cases, spending hundreds or even thousands of dollars on a single share of stock means making a quality investment that will pay off in the long run.
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But what if you don't have that kind of money at your disposal? The good news is that you don't need to limit yourself to lower-cost stocks just because you're on a budget. Here's the trick to owning the various stocks on your wish list -- including those whose share prices may seem out of reach.
Buy a piece of a share
You may not have the budget for a full share of an expensive stock. But that's where fractional shares come in.
Fractional shares allow you to purchase a portion of a share of stock if you can't afford a full share. Say there's a given stock that's trading at $500 a share, and right now, you only have $125 to invest. With fractional shares, you'd buy a quarter of a share of stock. And then, if that stock gains value, your portfolio value will rise proportionately.
Now one thing you should know is that not every brokerage account lets you buy fractional shares -- but many do, so if it's not an option in the account you have set up already, it could pay to open a new account. That way, you can load up on the stocks you want to own without money being a barrier.
Furthermore, you should know that it's possible to buy fractional shares of dividend-paying stocks. In that case, your dividend payments will reflect the portion of a share that you own. If a company pays a $20 dividend per share, for example, and you own one-quarter of a share of its stock, you'll get a $5 payment.
A great way to diversify
Not only do fractional shares allow you to get a piece of the companies you want to own, but they can also help you build a more diverse portfolio. Say you don't want to sink a lot of money into healthcare stocks right now, but you feel you should have that industry represented in your portfolio. With fractional shares, you can spend less but still get that diversification.
While a high share price doesn't necessarily make a company a good investment, it may be the case that you want to own certain stocks whose share prices are out of reach. Fractional investing could be an easy solution to that problem, and one that brings you closer to meeting your financial goals.
