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More money is always better, right? Well, if you want your money to grow for you, the best thing you can do is invest it.
If you want to invest in individual stocks, you need to buy shares, or a portion of ownership in a business. To invest, you need to buy a single share in that business, which will then (hopefully) generate interest on your investment. Easy enough, right?
This isn’t a big deal if you have $500 to buy 50 shares that cost $10. That’s perfect!
But what happens if shares are, say, $1,000? Big-name companies like Amazon, Facebook, Apple, and Google have sky-high stock prices, which makes buying an entire share way too expensive for everyday investors like me.
The expensive price per share makes a lot of new investors think that these big companies are out of reach for them. Fortunately, that’s not the case at all!
Fractional shares split up a single share into smaller pieces, allowing investors to get a piece of the action for less money (albeit for a smaller stake in the company).
Before fractional shares, you could only buy a single share in a business—which meant you were either priced out of the market or you had to save a lot of money before investing. While they definitely have a lot of upsides, fractional shares aren’t right for every investor.
The Pros And Cons Of Fractional Shares
Pros:
- Budget-friendly
- Diversification
- Save time
- Democratize the market
- Simplify investing
- Voting power
Cons:
- Limited availability
- Fees
- Sizing concerns
Fractional shares have skyrocketed in popularity since the financial crisis of 2008. And personally, I love the idea that I can buy a sliver of popular stock without breaking my budget.
However, not all fractional shares are created equal. Let’s dive into how fractional shares work, where they come from, and the pros and cons of fractional shares.
What Is Fractional Share Investing?
Before fractional shares, investors would have to:
- Find an individual stock to buy
- See how much the price was for a single share
- Buy a set number of shares from their broker
That sounds all well and good, but if shares are trading for more than you can afford, it means you have to invest elsewhere. And where’s the fun in that?
A fractional share is any share that’s less than a full share in a business—in other words, it’s a “fraction” of a full share. A fractional share happens when brokers split a share into units as small as 1/1000th.
The big benefit of fractional shares is that it allows you to buy individual stocks without spending thousands of dollars.
And personally, I enjoy investing in fractional shares! I’ve been a member of Stockpile since 2017, when I received free stock as a promotion. $25 worth of free stock has gained in value to nearly $90, which is pretty cool, considering I own just a tiny fraction of Amazon and Tesla:
Where Do Fractional Shares Come From?
It’s important to note that fractional shares haven’t always been available. They’re a relatively new phenomenon, gaining popularity over the last 20 years, largely in the United States.
However, the pandemic definitely accelerated the demand for fractional shares. When the market crashed in 2020, more people wanted to buy stock in big-name companies—so more brokerages started offering fractional shares to keep up with demand.
Previously, you could only get fractional shares as the result of a few situations, like:
- Mergers and acquisitions: When two companies merge, they have to do some funky stuff with their stocks. You have to create a shared, common stock for the company to even things out. In this situation, companies will offer fractional shares to simplify the math.
- Stock splits: Sometimes a company will decide to split up its shares by choice. This usually happens when the cost of a single share gets so high that it makes the stock unaffordable for most investors. To control the price of its shares, the company will split up its stock, which is how some investors end up with fractional shares.
- DRIPs: A dividend reinvestment plan, or DRIP, happens when you use the dividends earned from stock to buy more stock. Instead of taking a payout, you reinvest your money in the company. However, unless you’re rolling in cash, these dividends aren’t enough to buy an entire share. So, companies offer fractional shares in return.
Of course, the best way to get fractional shares today is to just buy them! In the past, you ended up with fractional shares as a result of wonky investing situations, but today, investors seek out fractional shares on purpose.
To get fractional shares, you can buy them from a broker like:
Although not every broker offers fractional shares, they’re much more popular because of investor demand. Technically, the broker will foot the bill for the entire share. From there, the broker will split up the share and sell it to investors who want a sliver of it.
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Pros And Cons Of Fractional Shares
Fractional shares might sound like a new-fangled way to complicate investing, but there are a lot of benefits to investing in fractional shares. With that said, there are a few downsides to fractional shares that every investor should know about, too.
Let’s dig into the pros and cons of fractional shares so you can make the best decision for your situation.
Pro 1: Budget-friendly
If you invest in fractional shares on a platform like Robinhood, you can literally pay just $1 to start investing. The best thing about fractional shares is that they make expensive stocks more accessible for investors. It democratizes investing by giving people like me affordable access to stocks like Tesla, Amazon, and Google that I would normally have a hard time affording.
Plus, since you buy fractional shares based on a set dollar amount, you get to set the price! If I only have $50 to invest, I can buy $50 worth of stock, and that’s it. I don’t have to keep an awkward amount of money hanging around because it isn’t enough to buy an entire share.
Pro 2: Diversification
Investing in fractional shares is a good way to diversify your portfolio. With a smaller stake in these big companies, you can sleep better at night knowing you didn’t put all of your money into one company.
You never want a single stock to take up too much of your portfolio. For example, if you have $10,000 to invest and single shares are $2,000, that means you can only buy 5 shares in one company. That isn’t great for risk or diversification—but fractional shares will help you weigh your portfolio more appropriately.
It’s really expensive to buy an entire share, so don’t spend all of your money on it! With fractional shares, you can enjoy the benefits of big-name stocks without putting all of your money in one place.
Pro 3: Save time
Without fractional shares, small-time investors would have to save up enough money to buy a single share. I don’t know about you, but I don’t want to spend months slaving away to save $1,000, only to be able to buy one share in a company.
With as little as $1, you can start investing in fractional shares right now. Whether you’re a recent college graduate or you want to retire soon, fractional shares speed up your investing timeline because there’s no need to wait.
Pro 4: Democratize the stock market
Fractional shares make stocks more accessible. This means that people without a ton of money can now invest in expensive stocks that were previously only accessible to the wealthy.
In this way, fractional shares are democratizing our stock market. More people are watching these companies, which gives the public a direct interest in how these companies are performing.
Pro 5: Simplify the investing experience
Even if you do have the money to buy single shares, it’s kind of complicated.
Let’s say you have $2,000 to invest and a single share costs $1,500. You can buy one share, but that’s going to give you $500 left over. That means you either need to let that money sit in your money market account, or you need to invest in a company with shares priced at $500.
That’s irritating and needlessly complicated. With fractional shares, you just plug in the dollar amount you want to spend and that’s it.
Pro 6: Decision-making power
My favorite perk of investing in fractional shares is the fact that it gives you decision-making power as an investor. I only own a sliver of Amazon, but I still have the power to vote during their board meetings—which I relish.
If you want Amazon to change its ways, why not become an investor? I’ve been able to vote on the brand’s DEI initiatives, leadership, and other important issues. In this way, fractional shares give small investors the power to change the course of these big companies.
Con 1: Availability
Of course, fractional shares aren’t perfect. The biggest downside is that they aren’t available everywhere.
Fractional shares simplify things for investors, but they’re a headache for brokers. If you’re interested in fractional shares, make sure you sign up for a platform that offers them.
Another thing to remember is that fractional shares are popular in the United States, but not in the international market. If you’re investing overseas, you might not have the option to buy fractional shares.
Con 2: Fees
The second downside to fractional shares is their fees. A 1% fee is pretty standard for fractional investments, but that can add up quickly.
With fractional investing, you buy a small stake in several big companies. Because you’re making a greater number of individual transactions, your broker could charge you more fees (depending on their fee schedule).
Con 3: Sizing concerns
With fractional shares, you aren’t getting the full benefits of an investment. In other words, you might not get the same returns with a fractional investment compared to buying a full share. Sure, you could see losses on your investments (that’s investing for you), but the potential gains are limited to the risk you took and the amount of money you put in.
The big question is this: if you own a very small fraction of a business, is it worthwhile? Is it generating a noticeable amount of money for you?
Sometimes it’s better to put your money in assets like ETFs, where you have exposure to a greater number of companies than you would with pricey individual stock.
Fractional investing is great if you’re just getting started, but there is such a thing as going too small, especially if you have aggressive investing goals.
Investing With Fractional Shares
Fractional shares aren’t perfect, but they’re a great way for beginners to start investing in individual stocks. I think they’re the ideal way for beginners to see the stock market in action, but they’re also a great option for diversifying your portfolio and making the most out of a small budget.
To start investing in fractional shares, all you need to do is:
- Pick your favorite broker (one that offers fractional shares)
- Fund your account
- Pick your stock
- Put in the dollar amount that you’d like to invest
- Allow the broker to process the transaction
And that’s it!
Normally it would take a lot of money to invest in big-name companies. The stock market hasn’t been a fair, accessible place historically, but thanks to fractional shares, people like me can afford to participate in the market.
Even so, make sure you weigh the pros and cons of fractional shares carefully. They aren’t right for all investors, so do your homework before you start investing.
