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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.
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:
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.
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.
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.
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.
Here are some of the biggest benefits of fractional shares:
Here are some of the potential downsides to fractional shares:
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:
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.
This post was last modified on April 20, 2023 1:34 pm
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