Fractional Share Investing for Beginners
The stock market is probably the first thing that comes to mind when someone mentions investing. Followed quickly by the word expensive and the thought I don’t have enough money to do that. Well, banish that thought, because with fractional share investing, all you need is $5 to $10 to start investing in stocks.
The major stock exchanges, like the New York Stock Exchange and NASDAQ, require you to buy at least one whole share at a time to participate, but fractional share investing allows new and smaller investors to be part of the action by offering fractions of stocks for purchase. This makes investing in big players like Amazon or Google, whose individual shares run over $1,000, accessible to everyday people.
Because you can’t go and purchase 1/64 of a share directly from the stock exchange, you would go through a brokerage firm who buys whole shares of stocks and then divvies them out to investors in fractional increments. This creates a lower entry point into the market for more people.
Brokerages dealing in fractional shares come in two varieties: those who allow you to buy a single fraction of a stock for a fee, and those who give you the option of fractional shares as a part of funding an investing portfolio, which might also contain ETFs (exchange-traded funds) and mutual funds. You can usually either create your own portfolio composition or invest in a pre-built portfolio. The right option for you will depend on your investing strategy and goals.
Regardless of your method of fractional share investing, it’s important you minimize the associated fees. When dealing with such small investment amounts, even a fee of a few dollars can seriously cut into your returns and potential for future investments. Look for no or low trade fees, no account minimums, no or low monthly fees, and no surprise charges.
Fractional share investing has many benefits:
- Low-cost investments — Being able to purchase shares at a lower cost over time results in strong dollar cost averaging, an important investing strategy. Dollar cost averaging is spreading out the purchase of an asset over time to reduce the impact of volatility on the overall purchase.
- Confidence — Starting small with fractional shares can give a new investor time to learn the ropes and gain confidence in their investing strategy and decisions.
- Diversification — Because you can buy many fractions of many different stocks at a low cost, you’re able to diversify your investments and spread your risk across a wide range of stocks and bonds early in your investing career. Diversification is a proven smart investment technique for all investors.
- Dividends — In some cases, fractional shares pay dividends (money paid to shareholders by a company from its profits). Getting paid dividends means you can use that money to reinvest in stocks or other investments. It’s a source of passive income. Companies pay dividends quarterly, monthly, or annually.
- Time — Starting with fractional share investing allows you to begin investing earlier in life, which puts time on your side to benefit from dividends, rising stock values, etc.
- Youth investing — Some brokerages have an option for youth accounts that can be linked to an adult’s account. This is a good way to teach children about investing, risk, interest, dividends, and other financial lessons. They can track their stock’s performance through their account and enter trades with parent permission.
- Gifts — Some brokerage apps allow you to request stocks as gifts or give fractional shares to others. This is a great way to build a portfolio without a lot of cash.