- If you don't want to pay for a stock's full price, you may be able to buy fractional shares.
- Fractional shares are proportionate to whole shares, such as how 0.1 shares of a stock that costs $100 would cost $10 for the fractional slice.
- Many brokers offer fractional shares with a low minimum investment, such as $1 or $5.
When it comes to DIY investing, there are generally two ways to gain exposure to stocks: fractional shares and whole shares.
Sometimes, whole shares are more than what an investor can afford. For example, an ETF might cost $200 per share, but perhaps you want to get started with investing $100. So, a fractional share could enable you to buy in at $100, giving you ownership over half a share.
Many brokerages like Charles Schwab and Fidelity offer the fractional share option, allowing you to still gain exposure to securities like stocks and ETFs without investing as much as if you had to buy whole shares. However, not all brokerages offer this option, and the minimums and fees can vary.
In this guide to investing in fractional shares, we'll examine how to buy fractional shares and why you might engage in this practice.
What are fractional shares?
Fractional shares may seem at first glance like you're getting a discount on a stock, but that's not really the case. Instead, it's all about proportions.
Definition of fractional shares
Fractional shares, also known as stock slices, are partial shares — as opposed to one full share — of a security such as a stock or ETF. The price of a fractional share is directly proportional to the whole share.
Many mutual funds also allow for fractional share ownership.
How fractional shares work
Traditionally, stocks have been traded in whole shares, and the price reflects one share. However, more brokers are now offering fractional shares or slices, which means you can buy part of a whole share, or you might buy whole shares plus some fractional shares, like if you have enough funds to buy 10.2 shares instead of just 10. This is often accomplished by the broker technically owning the whole share and then allowing its customers to buy fractions of that share.
The exact buying process depends on the broker, but often it involves entering in a dollar amount that you want to purchase, rather than the number of shares you want to purchase. Some brokerages only allow you to buy in certain dollar increments or fractions of whole shares, whereas others allow you to purchase any amount, typically starting at $1. So, sometimes that means you have a fraction of a share that goes to several decimal places, like owning 1.1178 shares of an ETF instead of just 1 or 1.5.
These fractional shares enable you to participate in stock gains or losses as if you owned the whole share, on a proportional basis. For example, if you own 0.25 shares of a stock priced at $100, and it goes up by $1, you would gain $0.25 (since you own 25% of one share).
Fractional shares also pay dividends, depending on the company or fund you're investing in.
"Buying fractional shares can help an investor diversify a smaller size portfolio by being able to incorporate these investments that would otherwise not be an option for them," Cassandra Kirby, Partner, COO, CCO, and Private Wealth Advisor at Braun-Bostich & Associates, told Business Insider. Historically, she added, investors could only buy full shares in a particular company, but the ability to buy fractional shares now allows you to buy a certain dollar amount.
However, not every company or fund offers fractional shares, so you'll only see the option to purchase a number of shares if that applies to the investment you're eyeing. But if your broker allows this trading feature and it's available for the security you want to buy or sell, you'll simply need to confirm the order after you've entered the dollar amount, and you'll be all set.
Examples of fractional share ownership
Some stocks have high share prices. That doesn't necessarily mean the stock is more valuable, just that the entry point for one share is high. For example, Meta is trading at around $570 per share as of late October 2024. Rather than buying one share for $570, you might place an order to buy $100 dollars worth of Meta stock. In that case, $100 would get you about 0.175 fractional shares of Meta.
So, you gain that exposure to Meta, and you're $100 can potentially grow at the same percentage of Meta's whole shares — e.g., a 5% gain for Meta means your $100 grows to $105. But if looking at dollar growth per share, not percentage, then you need to divide that dollar amount by the fraction you own.
In many cases, your broker or investment platform does the math automatically for you and you can see what your gains or losses are based on your fractional ownership.
Why buy fractional shares?
Fractional shares offer several possible advantages, such as:
Accessibility
Fractional shares make investing more accessible to all investors, even if you don't have a big budget. That said, some investments, such as mutual funds, still have high initial minimums, but once you invest in the fund, you can access additional fractional shares at a lower entry point.
Diversification
By allowing you to purchase on a dollar basis, you can more easily attain diversification, as you can spread your money across many different investments without needing to afford whole shares.
If you're just getting started building your portfolio, for example, you could spread out $100 across, say, 10 investments at $10 each, rather than having to buy whole shares of each. With whole shares, if one investment costs much more than the other, and you can only afford one share of each, that could throw off your portfolio weighting, as a larger percentage of your money would be in the security with the higher share price.
"The use of fractional shares may best suit an investor with a smaller dollar amount to invest who wishes to diversify their portfolio," said Kirby.
Ability to invest more
Sometimes you have enough for whole shares but the amount of funds you have to invest falls between two whole numbers. For example, if a stock costs $100 and you have $1,050 to invest, you could buy 10 shares and have $50 left over, which might mean you need to wait to add another $50 before buying an 11th share. But with fractional shares, you could buy 10.5 shares in this scenario, meaning you're able to put that $50 to work right away, instead of letting it sit idle until you can afford another share.
This can also be advantageous when reinvesting dividends. In many cases, a dividend reinvestment plan (DRIP) means your broker automatically reinvests dividends to buy fractional shares of the security paying the dividend. But even if you don't have this set up, you can take the cash from dividends and quickly put that back into other investments by buying fractional shares, since the dividend might not be enough to cover whole shares.
Dollar-cost averaging
For securities for which you can buy fractional shares, it's easier to dollar-cost average, meaning you invest the same amount periodically, regardless of the current share price, which can help mitigate risks like volatility. For example, you could invest $100 per month every month into the same ETF, as opposed to having to invest the exact amount of one share at that time.
How to buy fractional shares
Buying fractional shares is generally easy. Just follow these steps:
Choose an eligible brokerage
While fractional share investing is becoming more popular, not all brokers offer it, and the way they offer fractional investing can differ. Some popular brokers that offer fractional share investing include Fidelity, Schwab, Robinhood, and M1 Finance. Explore their offerings or those of other brokerage firms to see what appeals to you.
Open an account
Once you choose your brokerage, simply open an account by following their prompts. Often the process involves a few straightforward steps like inputting your name and birthdate, possibly uploading identification, and transferring money into the account.
Select your securities
Not all stocks or funds are available for fractional share investing. It depends on the security and the brokerage. So, explore your options and then decide which ones fit your investment goals and risk tolerance.
Place your order
The exact way to place your order for fractional shares differs by brokerage, but generally, you'll select the security you want, navigate to "buy" or something along those lines, and then choose how much you want to buy as a dollar amount, rather than a share amount. You may see a drop-down menu to switch from shares to dollars. The amount in dollars then automatically converts to fractional shares, e.g., buying $100 of a stock priced at $500 gives you 0.2 fractional shares.
Disadvantages of fractional shares
Although fractional shares can be helpful for diversification and using however much money you have to invest, regardless of the share price, there are some possible downsides to consider:
Limited availability
Not all stocks or investment funds offer fractional shares. So, if you go this route, you have a smaller pool to choose from. Also, it can limit your choice of brokerage based on who offers the fractional share investing features you're looking for.
Potential for less liquidity and speed compared to whole shares
You might also be limited when it comes to liquidity and speed with fractional shares vs. whole shares. For one, some brokers won't place fractional shares right away but instead group your order together with others to be able to trade whole shares. Also, your broker might not allow you to transfer fractional shares to another broker. Plus, fractional share orders typically only execute during market hours, so you might not be able to buy or sell during after-hours trading.
Limited shareholder rights
Fractional share investing can also affect your shareholder rights when it comes to corporate matters. If you don't own full shares, you might not be able to participate in proxy voting, depending on your brokerage. Still, you can earn dividends and participate in actions like stock splits and reverse stock splits, according to the SEC.
Potential fees
Some brokers charge an additional fee for fractional shares, either as a dollar amount or percentage. The fee is typically small, but it's worth factoring this in vs. buying whole shares for lower fees.
Overall, fractional shares offer several positives, but there are some downsides to consider. You don't have to necessarily choose between fractional shares vs. whole shares, as you can invest in both, such as with the example of buying 10.5 shares of a stock. But understanding fractional shares can help open up your investment opportunities, even if you have a limited budget.
"I would not say that fractional shares are better or worse than buying full shares," Kirby added. "Rather, they're a way to provide investors with a greater range of investments from which to choose."
FAQs about fractional shares
Do fractional shares pay dividends?
Yes, fractional shares typically pay dividends if the security itself pays dividends. You simply receive the dividends on a proportionate basis to the per-share dividend amount.
Can I sell fractional shares at any time?
No, you can't sell fractional shares at any time. Brokers may have certain limitations on when you can sell fractional shares, such as only during normal market trading hours, and liquidity may be more limited. But for the most part, you can sell at any time.
Are there any fees associated with fractional shares?
Yes, there may be fees associated with fractional shares. Some brokers may charge additional fees for fractional share orders, either as a dollar amount or a percentage of the transaction, so be sure to confirm this before placing an order.
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