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Many beginning investors struggle to come up with money to buy stocks. Most brokers let you open accounts with small deposits, but expensive shares mean you won't be able to buy much. Many companies have shares that cost hundreds or thousands of dollars -- if you only have $50 or $100 every month to invest, what can you do?
Fractional shares solve this problem. You can buy into stocks that would otherwise be out of your budget. You'll need to find the right broker to do this, so we're going to share the three best places to buy fractional shares.
A fractional share is a position in a stock equal to less than a whole share. The fraction is between 0 and 1. You'll often see half-shares after stock splits. Companies sometimes offer 1.5 or 2.5 new shares for every existing share, resulting in fractional shares.
But fractional shares can be smaller, too. Many companies calculate them down to thousandths or even ten-thousandths of a share.
Historically, companies issued whole shares. Exchanges also required trading in whole shares. In fact, throughout much of the history of the stock market, investors were encouraged to trade stocks in 100-share lots.
It was only with the advent of online brokers that buying and selling fewer than 100 shares at a time became common. Now transactions often involve single shares.
The idea of fractional shares isn't new. Even though exchanges didn't allow fractional shares to trade, many companies used them in shareholder reinvestment plans. Dividend reinvestment programs allowed shareholders to purchase additional stock with dividends. Because the dividend often wasn't enough to buy a full share, companies would keep fractional shares in their internal records.
The dividend situation above is a good example of when it's useful to buy fractional shares, but it's far from the only one.
It used to be that most stocks traded for $100 per share or less. When prices went above that mark, companies tended to split their stock. That resulted in more shares at a lower price, making them more affordable.
Today, stock splits have almost disappeared. And shares in popular companies might cost hundreds or thousands of dollars. Most financial institutions still let you open a brokerage account with $50 or $100 a month. But at this rate it could take months to come up with the cash for a single high-priced share.
Unless you go with a company that will let you buy fractional shares.
Fractional shares work well for any investor. Putting all your money into stock means you don't have extra cash sitting in your brokerage account. That's easier to do with fractional shares.
Just about the only downside is that tracking fractional shares is complicated, especially compared to dealing in round numbers like 100-share lots.
Fractional shares are especially important for investors who don't have the money to buy individual stocks. Not only do they give you access to the higher-priced stocks that you'd otherwise be unable to afford, but they also let you spread modest amounts of savings across a larger number of stocks. That gives you access to a diversified portfolio with less risk than a portfolio of one or two stocks.
The most challenging part of buying fractional shares is finding a brokerage that lets you do so. Many institutions recognize fractional shares from dividends or splits, but it's only recently that some major brokerages have started to look at offering fractional share programs to their investors. The following companies stand out:
Charles Schwab was the pioneer of the discount brokerage industry. With a history dating back nearly half a century, Schwab has been at the forefront of advocating for individual investors by disrupting the traditional Wall Street business model of high commissions and fees.
Schwab recently cut its commissions on stock and ETF trades to $0, continuing a trend that's been evolving in the industry for years. In October 2019, Schwab said that it would add fractional share trading to its list of investor-friendly options.
Schwab has a strong reputation for having an easy-to-use trading platform, extensive customer service, and access to global markets with no account minimums. When fractional share trading goes live, Schwab will be a good option for fractional share investors.
Robinhood is one of the more recent entrants to the fractional share trading arena, announcing its platform in December 2019. Fractional share trades in stocks with a market capitalization of more than $25 million and a share price of more than $1 will be available.
Robinhood is known best for its mobile app trading platform, which appeals to users who rely more on mobile devices than on desktop computers. It has a more limited set of investment offerings than some other brokers, offering no mutual funds. However, its commission-free trading on stocks and ETFs make it an attractive choice for investors.
Square is a newcomer to the investing world, having started out as a financial technology company focusing largely on facilitating electronic payments for small businesses. However, the company has pushed toward serving consumers with its Cash App person-to-person payment service, and Square is reaching out to a new generation of investors by adding stock investing and fractional share purchases to its mobile platform.
Investors shouldn't expect Square to have a wide array of investing tools right away. But for those who are comfortable investing and simply want a platform that can handle their fractional share needs, Square's no-commission offering comes at the right price and opens up a wider array of financial services that Square offers.
|Service||Pricing||Trade Frequency||Other Features|
|Charles Schwab||No commission||Real-time||Full slate of investment services and offerings, no account minimum, in-person customer service available|
|Robinhood||No commission||Real-time||Mobile-app enabled trading, no account minimum, simple platform|
|Square||No commission||Real-time||Person-to-person payments, business cash management|
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