Do you know how much a single share of Amazon costs? Practically an amount, not everyone can afford to invest. Statistically, 46% of millennials believe that investment requires a minimum of $1000.(1) However, that’s not true. There are plenty of ways to invest, with fractional share investment being one of them.
Say you wish to buy stocks of Tesla. With a price of $741.62 per share, it might seem a bit expensive and out of reach. Don’t worry, you can still invest in their stocks. Fractional share investing is a trading method that allows you to buy a portion of a full share. So, if you have $200, you can invest 0.27 of the shares.
If you are a professional investor or a first-time trader looking for the next stock, this is something that would simplify things for you.
What are Fractional Shares?
Fractional shares are a portion or part of a full share that allows investors to build their portfolio within limited capital. Instead of buying a full share of a company’s stock, you can now decide how much to invest. For example, if a company has a share of stocks worth $1700 and you have only $170, you can buy 10% of the share. The other way round, if a share is worth $200 and you have $700, you can buy 3.5 shares of company stock.
How Fractional Share Investing Works?
Even though fractional shares allow you to invest in less than a full share, exchanges in the financial sector do not give such freedom to brokerage firms. They are entitled to purchase full shares to secure their stocks.
Brokerages segment a full share into smaller parts for customers. Fractional shares can either be purchased as part of one share, say, one-fourth of it, or you can also opt for a dollar-based investment. Let say, you have $20 and the price of a single share of stock is $37.5. Instead of investing in half or one-fourth, you can simply invest $20. So, you own a 0.54 fraction of the share.
Alternatively, you can choose to start a recurring investment with a small fraction for a greater share over time.
( Also Read: What Is Debt Financing? )
How to Invest in Fractional Shares
Fractional shares do differ from full shares in the sense they are part of a single share. However, the investment process stays the same. The only thing you need to make sure of is that the selected brokerage supports fractional share investing.
How to Buy Fractional Shares
Open an investment account with a brokerage that supports fractional shares:
As stated above, the first thing you must do is finalize the brokerage. Finding one wouldn’t be tough as most of the brokerages today allow fractional share investing.
Fund your brokerage account:
Once you have your brokerage account set up, link it to your bank account to add funds. Depending upon the brokerage, adding funds may take 2-3 days. Some brokerages do provide credits for the expected funds.
Choose a stock to buy:
Brokerages have separate lists of stocks suggested under fundamental and technical analysis. Review each carefully to create a list of your stocks.
Enter a buy order:
Finally, enter the part of the share or the dollar amount that you want to invest in and place a buy order for the selected stocks. Review the order before hitting the buy button.
Best Brokers to Buy Fractional Stocks
If you are finding it hard to make the right choice, here are a few brokers that support fractional share investment with minimal or no commissions for stock.
➔ Charles Schwab
➔ SoFi Invest
➔ Interactive Brokers
➔ M1 Finance
Pros and Cons to Fractional Shares
Start investing with very little money:
Fractional share investing gives you the ease to invest without worrying about stock prices. If you have as little as $25, you can still invest in a stock of your choice.
Buy into companies with a high share price:
Since fractional shares are parts of a full share, you can easily invest in expensive shares which were only a dream earlier.
Create a diverse portfolio in a small account:
While conventional trading wouldn’t allow you to have all within a limited budget, fractional share investing lays the path for you. Have $50, divide it into $10 each and invest in 5 different stocks.
You don’t own the full share:
The only drawback is not having one full share but a part of it.
With a diversified portfolio, higher dividends, and greater profits, Fractional Share Investing is likely to gain more traction in the coming times. If you think investment requires thousands of dollars, then fractional share investment is all you need to know.