How to Buy Fractional SharesWhat Are Fractional Shares?

Fractional shares allow investors to purchase a portion of a stock or exchange-traded fund (ETF) for a fraction of the cost. This accessibility not only enables individuals with modest budgets to gain exposure to high-priced securities but also facilitates portfolio diversification, a cornerstone of sound investment strategy. By allocating capital across a broader spectrum of assets, investors can potentially mitigate risk, enhance overall returns and tailor their investments to align with their unique financial objectives and risk tolerance.

Whether you’re interested in fractional shares or other types of equity investments, a financial advisor can help you build and manage your portfolio.

What Is a Fractional Share?

For investors who don’t have the capital to buy a full share of a company’s stock, fractional shares allow them purchase stock by a percentage of a single share.

Fractional shares have been widely available since 2019, and have since gained prominence as it allows individuals with limited capital to gain exposure to companies with high share prices.

Say that you’re interested in owning stock in a popular chain of stores. However, you get sticker shock when you see that the stock is trading for nearly $3,000 per share. Using fractional shares, you can invest a smaller amount of money and acquire a percentage of a share.

How to Buy Fractional Shares

An investor looks at a stock's recent performance on her phone.

Fractional share investing takes an innovative approach in finance, opening access to high-priced securities and empowering investors with limited capital to diversify their portfolios.

The process of acquiring fractional shares is remarkably straightforward and can be facilitated through most major brokerage platforms. To start, investors must open and fund a brokerage account, a process that typically involves providing personal and financial information, as well as transferring funds from a bank account or another financial institution.

Once the account is funded, investors can place an order for the desired stock or ETF, specifying the dollar amount they wish to invest. The brokerage will then execute the trade, allocating the appropriate fraction of a share based on the current market price.

Brokerages offering fractional include:

Pros and Cons of Fractional Shares

Fractional shares represent a significant shift in how individuals can participate in the stock market. They offer a way for new and small investors to gain exposure to the stock market without committing large amounts of money. However, investors should be aware of the limitations and potential complications associated with fractional investing.

Pros of Fractional Shares

Accessibility: One of the key benefits of fractional shares is increased accessibility to stocks with high share prices. Without fractional shares, investing in high-priced companies like Netflix or NVIDIA, would be out of reach for many individual investors with smaller budgets.
Diversification: By allowing investors to allocate smaller amounts across a range of stocks, fractional shares can potentially mitigate risk through diversification. Imagine an investor with $1,000 to invest – with fractional shares, they could purchase portions of 10 different stocks rather than being limited to just a few full shares.
Reinvestment: Fractional shares also allow you to automatically reinvest dividends. This means any dividend payments from stocks can be immediately used to purchase more shares, compounding the investment benefits over time.
Flexibility: Fractional shares offer flexibility in investment and saving strategies. Investors can allocate exact amounts of money to specific stocks, optimizing their investment according to personal financial goals.

Cons of Fractional Shares

Fees: While fractional shares increase accessibility, they may come with higher trading fees compared to full-share transactions. Some brokers charge additional fees specifically for fractional trades, which could impact potential returns, especially for smaller investments.
Added complexity: Tracking fractional share ownership across multiple companies can also be more complex than tracking full shares. This added complexity may make it challenging to accurately calculate total portfolio value.
Limited availability: Not all brokerage firms offer fractional shares, and the availability of specific stocks for fractional share purchasing can also be limited. This means that some investors might miss out on buying certain stocks through this method.
Voting rights and stock splits: When you own a fractional share, you typically do not have voting rights in the company’s shareholder meetings. Additionally, in the event of stock splits, the handling of fractional parts can be complex and vary by brokerage.

Can You Buy Fractional Shares of Other Assets?

A woman contemplates purchasing fractional shares of an ETF.

In addition to partial shares of stocks, investors can also purchase fractional shares of exchange-traded funds (ETFs) through certain brokerages. ETFs are investment funds that hold a basket of securities, such as stocks or bonds, and trade on an exchange like individual stocks.

By offering fractional shares, brokerages allow investors to gain exposure to a diversified portfolio of assets within an ETF without having to purchase a full share, which can be particularly beneficial for those with limited investment capital. For example, if an investor has $100 to invest and an ETF share costs $300, they can still invest in that ETF by purchasing one-third of a share. Many of the same brokerages that offer fractional shares of stocks also provide the option to buy fractional shares of ETFs.

Other asset classes where fractional investing may be possible include real estate investment trusts (REITs), commodities like gold or silver through exchange-traded products (ETPs), and certain alternative investments like private equity or hedge funds.

Bottom Line

By allowing investors purchase partial shares of stock and ETFs, fractional shares are aimed at breaking down barriers posed by high share prices. While fractional shares offer increased accessibility, flexibility and portfolio diversification, investors must remain mindful of potential drawbacks, such as fees and complexities in tracking ownership.

Investing Tips

Your risk tolerance and risk capacity can play key roles in dictating what kinds of assets are in your investment portfolio. The former refers to the level of risk you’re comfortable with assuming. Risk capacity, on the other hand, is the amount of risk that you can realistically take on, given your financial situation.
If don’t have the time or knowhow to manage your portfolio, consider letting a financial advisor do it for you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.