Buying fractional shares of stock is a way to invest in companies you want to own a part of without committing a lot of money.
Perhaps you’ve even seen ads for companies that offer fractional share investing that look something like this:
The idea is that you can buy a small slice of a company — Google, for example — without committing the thousands of dollars you might need to buy even one full share, let alone a full lot of 100 or more shares.
Team Clark has explored the ins and outs of fractional share investing and identified the best ways to get started.
In this article, we’ll explain how fractional shares work and how you can invest in them. And money expert Clark Howard will tell us who are the best candidates for fractional investing.
Fractional Shares: What to Know About Investing in Them
1. What Is a Fractional Share?
Fractional shares are pieces of one full share of a company or exchange-traded fund (ETF).
In the past, you had to have enough money to buy at least one full share in a company, but that is no longer the case.
Now, you can take whatever money you have to invest and buy as much of that company’s stock as you can — even if that’s only 1% of one share.
Let’s take a look at an example:
If Amazon’s stock is priced at $2,691.43 per share but you have only $25 to invest, you could buy almost 1% of one share with your money.
It’s important to note that you can buy and sell fractional shares only through certain brokerages.
2. Is It Worth Buying Fractional Shares?
Fractional shares are a great way to get your toes wet in the stock market, especially if you don’t have a lot of money to invest.
“The advantage of fractional shares is that you can own a lot more — a bigger variety — of stocks than you could with the same amount of money,” money expert Clark Howard says.
“Now that you don’t face the pricing discrimination that used to exist, you can own a few dozen stocks with a relatively little amount of money. In the past with a relatively little amount of money, you were lucky to be able to buy a single stock.”
Right now, you’re not earning a whole lot of interest in a money market or savings account. Investing in fractional shares gives your money much more potential to grow. Of course, there is always the chance you will lose money, but that’s not likely over the long haul.
Still, you’ll want to make sure that you’re in a position to invest in fractional shares before you get started. That means making sure:
- You’ve paid off all of your high-interest debts.
- You’ve built an emergency fund.
- You’re taking advantage of your employer’s 401(k) program and investing at least enough to get the full company match.
- You’ve fully funded any other tax-advantaged accounts you have, such as a Roth IRA.
And Clark has another, more general, caveat.
“I’m only in favor of people owning individual stocks — fractional shares or full lots of 100 or more shares — when they’ve already set a base, or core, investment in index funds.”
Clark says that beginning investors are much better served by putting their money in the broader markets.
“When you try to build your own portfolio of individual stocks, unless you tend to it all of the time and unless you have enough money and enough interest to really diversify it to a large number of stocks, you’re putting too many eggs in too small a number of baskets,” he says.
“That’s why for me it always starts with having the base of your investing in widely diversified index funds or even a target retirement fund. From there, if you then want to own fractional shares and individual stocks, it’s okay. Chuck Schwab himself calls it ‘core and explore.’”
3. Where Can I Buy Fractional Shares?
You might have heard of Robinhood, a finance startup that has done perhaps more advertising around fractional share trading than its competitors. But as awareness around fractional shares has risen over the last couple of years, much larger and more established brokerages have gotten into the fractional share game.
Here are some of the places you can currently buy and sell fractional shares, along with some pertinent information about each:
Which of these services you choose will depend on what you’re looking for. Some — like Acorns and Bumped — allow you to save and invest with little effort on your part. Others — like Fidelity and Schwab — are traditional brokerage accounts that you will need to fund and manage.
4. Do Fractional Shares Pay Dividends?
Fractional shares do pay dividends (if the stock you buy is a dividend-paying stock), just like full shares. And this could be an important part of your investment strategy.
Dividends are a portion of a company’s earnings that are paid back to investors at certain periods (usually quarterly) throughout the year. These dividends can be paid out in cash or in the form of more stock through something called “dividend reinvestment.”
If you invest in dividend stocks, you can grow the amount of stock you have without investing any additional cash. The amount of stock you own increases each time the dividend is paid out.
Let’s say that through fractional share investing, you’ve accumulated one full share of IBM stock. If IBM stock is around $100 a share and is paying a dividend of $1.62 per year, that means that over the course of the year, you can add another 1.62% of a share to your portfolio without investing another dime.
Dividend reinvestments are a great way to grow your nest egg on autopilot. In many cases, you can invest in fractional shares that will pay you upward of 4% in dividends — much more than you can earn in a bank account. Just be aware that there’s always risk in the market. The share price of the stock could drop so much that it offsets the dividend gains. Or the company’s board could vote to reduce or even eliminate the dividend.
Buying fractional shares is a great way to buy stock in companies that interest you, if your funds are limited or if the price of the company you want to buy into is out of your reach.
Just make sure you’ve checked all of the other boxes on your financial health checklist —including making sure you’re widely diversified — before you get started. You could be well on the way to building a portfolio of some of your favorite companies, a few dollars at a time.