Fractional shares allow investors to create a diversified portfolio of stocks and ETFs without needing much capital.
In this article, I’ll explain how fractional shares work, what’s good about them (and what’s not) and which investment companies offer them.
Table of Contents
- What Are Fractional Shares?
- How Do Fractional Shares Work?
- Advantages of Fractional Shares
- Disadvantages of Fractional Shares
- Best Fractional Share Investing Brokerages
What Are Fractional Shares?
Some investment terms are hard to define based on name alone, but the term “fractional shares” is literal.
A share represents ownership of a company. When you buy stock, you own shares, or equity, in a publicly traded company.
Until recently, if you wanted to buy stock in a public company, your only option was to buy at least one whole share. If the price of a single share was $1,000 and you didn’t have $1,000 to invest, you were out of luck.
Now, though, you can buy a fraction of a share of most public companies for $1 or less. The same goes for ETFs and even cryptocurrencies.
Says money expert Clark Howard: “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.”
Single shares of Warren Buffet’s investment company, Berkshire Hathaway, were trading well above $450,000 as of February 2023.
You could invest in a mutual fund that had Berkshire Hathaway in its portfolio. But to hold stock in the company yourself, prior to fractional shares, you’d need more than $450,000. Now you need $1.
And you might end up with some fractional shares in your portfolio even if you don’t buy them upfront. The other ways to hold fractional shares:
- Reinvest your dividends.
- Invest in a company that performs a stock split.
- Invest in a company that gets acquired or is involved in a merger.
How Do Fractional Shares Work?
You can buy a fractional share in almost the same way that you’d buy a full share.
First, identify the company in which you want to invest. Then figure out the company’s ticker symbol. Use the ticker symbol to find the company within your investing app or website.
The next step varies. With Robinhood, for example — a leader in the fractional shares space — instead of entering the number of shares you’d like to buy, select “Buy in Dollars” and enter an amount as little as $1. Or select “Buy in Shares” and enter an amount as small as 0.000001.
Once you complete the transaction, your fractional share will be part of your portfolio.
Are Fractional Shares the Same at Every Investment Company?
There’s a growing list of companies that offer fractional shares. However, some brokerage firms restrict the stocks that they make available via fractional shares to a relatively small number of larger companies. So if you’re creating an investment account and intend to buy fractional shares, it’s a good idea to research a brokerage firm’s fractional shares policy.
How Much Do Fractional Shares Cost?
The minimum amount that each company allows you to invest via fractional shares varies. It’s usually between $1 and $5 but sometimes as small as 1 cent.
Do Fractional Shares Pay Dividends?
Yes. If you invest in a fractional share of a stock that pays a dividend, you’re entitled to it. If the dividend is $1 per share and you own one-half of a share, you’d get a dividend of $0.50.
Advantages of Fractional Shares
Here are some of the biggest benefits of fractional shares:
- Low-cost diversification. Thanks to fractional shares, it’s possible to invest in the 10 most expensive stocks in the United States for just $10. That makes investing much more doable for those without a lot of extra money.
- Fewer investment dollars in cash. It’s rare that the amount of money you have to invest matches up precisely with a whole number of shares. If you have $100 to invest, and the share price of the company in which you want to invest is $1, then great! You can buy 100 shares and won’t have any money leftover. But say the price is $30 per share. Without fractional shares, you’d be able to buy three shares for a total of $90 and you’d have $10 sitting in cash. Fractional shares let you invest that entire $100 in that company.
- Beneficial for dollar-cost averaging. Building off of that last point, often the best way to invest is to take a portion of your income each paycheck or each month and invest it. Rather than trying to time the market and buy at the best possible price, you’re investing a consistent amount at regular intervals. Your average price per share with this type of strategy won’t be the lowest or the highest. It’s much easier to practice dollar-cost averaging if you’re not restricted to investing only in whole shares.
Disadvantages of Fractional Shares
Here are some of the potential downsides to fractional shares:
- Can encourage more active trading. The easier it is to buy into an investment, the easier it is to trade more actively. Active trading isn’t typically viewed as an ideal approach to retirement investing.
- Limited selection of stocks and ETFs. The selection available to you through fractional shares varies depending on which investment company you use.
- Reduced liquidity. Fractional shares don’t trade as quickly or as easily as full shares. And some investment companies won’t let you transfer fractional shares to them if you’re changing companies.
Best Fractional Share Investing Brokerages
Before you start hunting for a new brokerage where you can trade fractional shares, take a look at the bigger picture and, instead, pick a firm that serves your financial needs best overall.
Then, if you feel like a different firm would serve you better specifically for fractional shares investing, make sure you review its policies.
Personally, I think Robinhood is the top investment company for fractional shares. It’s a good platform if you’re just getting started because it’s so easy to use. Also, Robinhood is among the most competitive investment apps in two key areas:
- The sheer volume of stocks and ETFs available on the platform for fractional share investing. Robinhood also offers fractional investing for cryptocurrencies, although Clark isn’t a fan of crypto and doesn’t consider it as an investment.
- Robinhood allows investors to buy assets for less than $1.
Determining the “best” fractional share investment company depends on what you’re looking to do. Here’s some information on the fractional share programs offered by a number of the largest investment companies.
|Company||Investment Opportunities||Minimum Purchase||Worth Noting|
|Acorns||ETFs only||$5||Rounds purchases up to the nearest dollar; invests change|
|Betterment||80+||$1||Robo-advisor; annual fee required; focused on ETFs|
|Fidelity||7,000+||$1||Ability to gift fractional shares through custodial accounts|
|Interactive Brokers||11,000+||$1 or 1/10,000th of a share||Fractional shares on OTCBB securities (not on major exchanges)|
|M1 Finance||6,000+||$0.01 or 1/100,000th of a share||$100 minimum starting balance required|
|Robinhood||7,000+||$1 or 1/1,000,000th of a share||Fractional crypto investing|
|Schwab||S&P 500||$5||Limited to 30 stocks at a time; no ETFs|
|SoFi||43 total stocks & ETFs||$1||Supports selling as little as 0.00001 shares.|
|Stash||4,000+||$5||Charges monthly fee; offers fractional bonds; also offers fractional shares as rewards|
Fractional shares are an easy way to build a well-diversified portfolio, especially if you don’t have a lot of money to invest.
If you’re keen to invest in individual stocks or ETF-based index funds, fractional shares are a great option. It’s also a good idea to review Clark’s advice on saving and investing to make sure that your investment decisions fit well into a sound overall financial plan.