Here’s What Happens When You Buy Fractional Shares in Your Brokerage Account

You'll often hear that building a diversified portfolio in your brokerage account is a good way to make money. And it's also important to diversify your holdings to protect yourself from losses during stock market downturns.

It used to be the case that diversifying a portfolio on a budget wasn't so easy. After all, the less money you had, the harder it was to branch out into new investments.

But these days, a new brokerage account feature makes it easier to diversify your portfolio. Most brokerages today allow investors to buy fractional shares, which could make it possible to put your money into a larger number of individual companies. Here's what fractional investing entails.

When you only own a fraction of a piece of the pie

It used to be that if you wanted to invest in a given company, you had to buy shares in full increments. These days, you can buy a fraction of a share of stock instead. And that might allow you to branch out nicely in your portfolio. It might also give you access to companies whose shares might otherwise be out of reach.

Let's imagine you want to invest in Chipotle both because you like its menu and you think it's a strong company with solid financials. Although the mega chain is known for its affordable food, its share price is anything but.

As of this writing, Chipotle is trading for about $2,040 per share. Of course, stock prices can fluctuate daily. But either way, it's pretty fair to call Chipotle stock high-priced.

Thanks to fractional shares, though, you can invest in Chipotle even if you only have $20, $40, or $80 to work with. You'd simply own a portion of a share of that stock instead of a whole share.

Now, your goal in buying stocks is to see their value rise so you can make money. With fractional shares, you benefit proportionally as share prices rise.

So if you buy 1/4 of a share of a company that's trading for $100, and its share price rises to $120 over time, your $25 share would grow to be worth $30. Of course, if the opposite happens, and that company's share price drops, you'd take a proportionate loss. So if that same company's share price were to drop to $80, your $25 share would only be worth $20.

You should also know that if you own fractional shares that pay dividends, you're entitled to those paydays. But again, you'll get a proportionate payout. So if a given company pays a quarterly dividend of $40 per share, and you own 1/4 of a share, you'd be in line for $10.

An option worth pursuing

Most major brokerages these days allow investors to buy shares of stock -- as well as ETFs -- on a fractional basis. If yours doesn't, then you may want to switch to a brokerage that gives you that flexibility.

Fractional shares could be your ticket to diversifying your holdings and meeting your investing goals. And given how common the option is, there's really no reason to deny yourself that opportunity.