What are Fractional Shares and How to Buy Them

Introduction

Investing in the stock market has traditionally required purchasing whole shares of a company’s stock. However, with the advent of fractional shares, investors now have the opportunity to own a portion of a share, making investing more accessible to a wider range of individuals. In this article, we will explore what fractional shares are, how to buy them, and discuss their pros and cons.

What are Fractional Shares?

Fractional shares are essentially smaller parts of a whole share of stock. Instead of buying a full share, investors can purchase a fraction of a share, allowing them to invest in companies that have higher share prices. For example, if a company’s stock is priced at $1,000 per share and you only have $100 to invest, you can buy 0.1 (or 10%) of a share.

How to Buy Fractional Shares

There are several ways to buy fractional shares:

1. Directly from a brokerage: Many online brokerages now offer the option to buy fractional shares. You can open an account with a brokerage that supports fractional investing and purchase fractional shares of the stocks you are interested in.
2. Through a robo-advisor: Robo-advisors are automated investment platforms that can help you invest in fractional shares. These platforms typically offer a range of investment options and can guide you through the process of buying fractional shares.
3. Dividend reinvestment plans (DRIPs): Some companies offer DRIPs, which allow shareholders to automatically reinvest their dividends into additional shares of the company’s stock. This can result in owning fractional shares over time.

Pros of Fractional Shares

1. Accessibility: Fractional shares make investing more accessible to individuals with limited funds. It allows investors to diversify their portfolio by investing in multiple companies, even with a small amount of money.

2. Cost-effective: Fractional shares enable investors to participate in high-priced stocks without having to purchase a whole share. This can be cost-effective and allows for greater flexibility in portfolio management.

3. Dollar-cost averaging: Fractional shares can be an effective way to practice dollar-cost averaging. By investing a fixed amount of money regularly, investors can accumulate fractional shares over time, potentially reducing the impact of market volatility.

Cons of Fractional Shares

1. Limited availability: Not all brokerages offer fractional shares, so investors may need to research and find a brokerage that supports this feature.

2. Fractional ownership: Owning fractional shares means you do not have voting rights or the ability to attend shareholder meetings. This may be a disadvantage for some investors who value these rights.

3. Potential liquidity issues: Fractional shares may have lower liquidity compared to whole shares, making it harder to sell them quickly at the desired price.

Conclusion

Fractional shares have opened up new investment opportunities for individuals with limited funds. They provide accessibility, cost-effectiveness, and the ability to practice dollar-cost averaging. However, they also come with limitations such as limited availability, fractional ownership, and potential liquidity issues. Before investing in fractional shares, it is important to consider your investment goals and assess whether fractional shares align with your overall investment strategy.

Remember, investing in the stock market involves risks, and it is advisable to consult with a financial advisor before making any investment decisions.