When it comes to investing in publicly traded companies, stocks are the basic units of share ownership. And for most of the history of the stock market, shares could only be bought and sold whole, which means that if an investor didn’t have enough money to buy a whole portion of a company’s shares, they couldn’t invest in it. directly. This made expensive stocks difficult for average retail investors to trade.
What are fractional shares?
Fractional shares are exactly what they sound like: they are fractions of a share. Fractional stock trading allows investors to buy and sell dollar shares instead of shares.
For example, an investor could buy and own 0.39 shares of Stock A or sell 1.84 shares of Stock B. Since the advent of fractional stock trading, investors can own a piece of almost any stock or ETF for $1 (or less). , in some cases ).
How do fractional shares work?
Suppose you want to buy shares of a fictitious company called Acme Adhesives, whose shares are currently trading at $435. You think the company is undervalued, so you want to buy its shares. However, you only have $50 to invest, so you can’t afford to buy a full chunk of the company’s stock.
With fractional stock trading, you could buy exactly $50 of these shares at their current price of $435. Using your brokerage app, you would place an order to buy for $50, and this order would be filled at the current price of $435, which which would give you ownership of approximately 0.115 shares, or 11.5% of a share, of Acme Adhesives.
What are the benefits of trading fractional shares?
The ability to buy and sell fractional shares offers two main benefits.
Greater accessibility
First, it allows investors with less disposable income to buy expensive stocks and funds even if they don’t have enough cash on hand to buy entire shares. This perspective is particularly beneficial to younger, lower-income investors who may not have excess investable cash but still want to play an active role in growing their savings through investing.
More control over portfolio weighting
Second, and perhaps most importantly, fractional stock trading allows for more precise asset allocation. Many strategic investors prefer certain stocks to represent a specific percentage of their total portfolio value, which requires periodic rebalancing to account for changes in stock price and other factors. Fractional stock trading allows investors to buy and sell shares in exact dollar amounts, making it much easier to precisely customize the weighting of individual stocks in one’s portfolio.
What brokerage firms offer fractional share trading?
Many brokerages now offer fractional share trading, but different brokerages have different minimum trading amounts and other stipulations. The ones listed below have some of the lowest barriers to entry and the most stocks and funds available for fractional investing.
Many other brokerages offer some form of fractional stock trading but have additional stipulations. For example, M1 Finance allows fractional investing in over 6,000 shares and funds, but all fractional share trades are executed during the same window every day (unless the client pays for a premium account), which means that Traders have less control over the price at which their fractional trade is executed, which can be a huge disadvantage when buying or selling volatile stocks.
When was fractional stock trading introduced?
In 1999, a brokerage firm called BuyandHold allowed clients to trade fractional stocks with a subscription of just a few dollars a month, but this didn’t last. For almost 20 years, fractional stock trading wasn’t much of an option, but in 2017, M1 Finance launched its fractional stock offering. As of late 2019, Robinhood, SoFi, and CashApp were also offering fractional trading. Fidelity followed suit in 2020.
Frequently Asked Questions (FAQs)
Below are answers to some of the most common questions investors have about fractional shares and how they work.
Do fractional shares come with voting rights?
In many cases, fractional share owners do not have the same voting rights as full share owners, but this depends on the brokerage firm through which the shares were purchased. Interestingly, fractional share owners in Robinhood do get voting rights. The brokerage weighs client votes based on the number of shares they own (even if it’s less than a single share), then aggregates these results before passing them on to the company in question.
Do fractional shares pay dividends?
Fractional share owners are entitled to dividends proportional to the number of shares they own (even if they own less than one full share). In most cases, brokerage firms add dividend payments to investors’ cash accounts, unless automatic dividend reinvestment has been enabled.
Can you buy fractional shares of ETFs?
Most brokers that offer fractional share trading allow investors to choose from a variety of exchange-traded funds as well as individual stocks.
Can you buy fractional shares of cryptocurrency?
Most crypto exchanges allow investors to buy fractional coins in the same way that brokerage houses allow investors to buy fractional shares.
