Investing in stocks can be a fantastic way to build long-term wealth, but it can quickly become expensive. Tesla (TSLA 0.78%), for example, is currently priced at over $1,200 per share, and it's recommended to invest in at least 15 to 20 different stocks for a well-balanced portfolio. At that rate, it could easily cost thousands of dollars to get started investing.
If you don't have that much money to shell out, it can be tempting to invest in penny stocks. Penny stocks trade for less than $5 per share, and they're one of the most affordable types of investments. They're also incredibly risky, however, and there's a good chance you'll lose more than you gain.
Fortunately, there's another way to invest in big-name stocks like Tesla without breaking the bank: fractional shares. With this strategy, you can invest in some of the most expensive stocks for as little as $1.
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What are fractional shares?
A company's stock price is how much it costs to buy one full share of stock. However, you don't necessarily have to buy a full share to invest in a company. With fractional shares, you can buy just a small slice of a share of stock for a fraction of the price.
The best part about fractional shares is that you choose how much you want to spend. If you wanted to invest in Tesla, for example, you could buy a full share for its current price of around $1,200. Or you could buy half of a share for roughly $600. Or you may choose to buy an even smaller slice for $100, $10, or just $1.
Fractional shares make it much more affordable to build a healthy portfolio. If you're on a budget, it can be tempting to buy less-than-ideal stocks simply because they're cheaper. But with fractional shares, you can buy dozens of strong stocks for less than $100.
This strategy can also be smart if you're nervous about investing in the stock market. Even if you can afford to spend hundreds or thousands of dollars investing, it can be daunting to sink a lot of money into stocks for the first time. With fractional shares, you can start small to get your feet wet, then gradually invest more as you become more comfortable with the stock market.
Things to know before you get started
One of the most important things to remember when investing in fractional shares is that general investing principles still apply.
It's crucial to do your research before you buy anything, and only invest in stocks that you believe will perform well over the long term. It can be tempting to invest in risky stocks because there's less at stake when you're only investing a few dollars. However, while these stocks may be more affordable with fractional shares, they're still dangerous -- regardless of how much you're spending.
Keep in mind, too, that you won't see the same earnings with fractional shares as you would if you were investing in full shares of stock. If you only own, say, one-tenth of a share, you'll only see one-tenth of the earnings compared to a full share. This isn't a bad thing necessarily, but it is important to keep your expectations realistic.
Finally, check with your broker before you buy. Not every brokerage will let you buy fractional shares.
Fractional shares can be an affordable way to invest in expensive stocks, making it easier to build a robust portfolio. With this strategy, you can get started in the stock market regardless of your budget.
