You may have wondered: Is this legit?
A whole share of Google parent company Alphabet costs over $2,900 as of December 2021.
Amazons share price is more than $3,500.
Ready to invest but don’t have a huge amount to start with? Learn abouthow micro-investing worksandthe best apps to use.
The concept is known as fractional shares, and its a game-changer forbeginning investors.
What Are Fractional Shares?
A fractional share is a fraction of a stock, just as the name suggests.
With fractional shares, you name your price when youinvest in stocks.
It doesnt matter if a share of Netflix costs $400 or $500 or even $1,000.
If $25 is what you want to spend, thats what youll pay.
If Netflix was trading for $500, youd get 5% of a share.
Thats a big deal for new investors who dont have deep pockets.
Probably not as good as youd like.
It always seems like an uphill battle to build (and keep) a decent amount in savings.
But what if your car breaks down, or you have a sudden medical bill?
Ask one of these companies to help…
Fractional shares technically arent new.
Many investors opt to reinvest their dividends.
Stock splits also result in fractional shares.
Online brokers made it easier to buy smaller amounts of stock.
But due to commissions, buying a single share often didnt make sense.
Paying a $9.99 commission to buy a $100 stock would seriously eat into your returns.
In 2020, many traditional brokerage services, including Charles Schwab and Fidelity, followed suit.
Fractional shares have soared in popularity particularly since early 2020, when people took upstock tradingin greater numbers.
Because many platforms now offer commission-free trading, one of the biggest arguments against investing smaller amounts has disappeared.
Where Can You Buy Fractional Shares?
For example:
These are just a few of the platforms that offer fractional investing.
When youre investing small amounts, even a $1 charge can eat away at your returns fast.
Fractional shares dont reduce your risk of losing money.
Your potential gains and losses are the same with fractional shares as when you buy full shares.
You get the same benefits because you get the same percentage gains.
For example, Amazon shares soared 72% in 2020.
Theyre best used in conjunction with index funds.
In recent years, those have been heavily concentrated in the tech sector.
People arent exactly rushing out to buy fractional shares of utility and agricultural stocks in droves.
A good strategy is to make index funds the backbone of your investments.
Dollar-cost averaging is a great strategy for fractional shares.
If you have a monthly investment budget, youre probably practicing dollar-cost averaging.
Thats a strategy of committing to invest on a regular schedule no matter what happens in the stock market.
Stock prices can fluctuate a lot.
You may have to sell your shares if you switch brokerages.
While its pretty easy to transfer whole shares from account to account, you typically cant transfer fractional shares.
Purchasing fractional shares is way better than penny stock trading.
For individual investors seeking to invest a small amount of money, fractional shares beat outpenny stocksany day.
The companies behind them have a market cap below $300 million.
But theres a good reason they trade for so cheap.
Many of the companies are either in financial trouble or have zero track record.
Penny stocks are also widely associated with scams.
With fractional share investing, long-term investing pays off.
Regardless of whether you buy fractional or whole shares, the most successful investors take a buy-and-hold approach.
That means they buy stocks they want to own long term.
FAQs
Do fractional shares pay dividends?
What happens to my fractional shares if theres a stock split?
It depends on your brokerages rules.
If a forward stock split occurs, many brokerages will increase your proportional amount of fractional shares.
Is there a minimum for purchasing fractional shares?
Minimums for purchasing fractional shares vary by brokerage, but they typically range between $1 and $5.
Are there any fees?
Check with your broker about fees.
Many platforms offer $0 commissions for stock trading, whether youre buying fractional shares or full shares.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder.
Send your tricky money questions to[email protected]or chat with her inThe Penny Hoarder Community.
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