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Here's what you need to know about fractional share investing.

If you can’t afford to buy a share of a pricey stock, fractional share investing is worth considering. Investors can purchase a fraction of a security (such as a mutual fund, stock or exchange-traded fund) with the hope to increase their holdings over time. Purchasing fractional shares makes investing accessible, especially to those beginning their investment journey. Read on to discover if fractional investing is right for you and how to do it.

Fractional Share Investing Explained

Fractional investing is an investment method that allows investors to buy partial shares of a security. Some markets, like the New York Stock Exchange, require investors to buy whole shares of securities. For investors that are unable to purchase high-priced stocks like Alphabet Inc. or Berkshire Hathaway Inc., fractional share investing allows them to invest for a smaller amount.

Some firms have chosen to offer fractional shares. To do so, the brokerage firm will buy whole shares. Then, it will sell off the whole shares in partial shares to investors. This can be a great investment option for new investors. It gives them a more affordable way to access higher valued securities.

What Are the Benefits?

Here's what you need to know about fractional share investing.

Fractional shares can work to your advantage. This is especially true if you want to gain exposure to a stock that is more expensive than what you are able to afford. For example, let’s say you only have $100 to invest but want to gain access to a share of ABC company’s stock. For this example let’s propose ABC company’s stock is trading at $1,000 per share. Even if this is out of your price range, with a fractional share option you could buy 10% of one share. Through this method, you can invest in the market regardless of your budget.

Another benefit to using fractional share investing is that it allows you to invest your available cash. With some brokerage firms, you may only be able to purchase whole shares of stock. If you bought one share of XYZ company’s stock for $100 but had $130 to invest, you wouldn’t be able to invest the remaining $30. If you work with a firm that allows fractional share investing, you can invest all your cash into the market.

Additionally, fractional share investing gives investors a little more flexibility. Instead of having an investor’s funds held up with one share of a pricey stock, they are able to diversify their investment selection. Allowing investors to diversify can reduce their risk exposure and can help them maximize their potential returns.

Potential Pitfalls

While fractional share investing has some advantages, there are drawbacks as well. To start, you may not be able to trade fractional shares at all financial institutions. If you decide to purchase fractional shares, there’s a good chance you will have to trade those shares at the same firm. You may also have to wait longer for fractional shares to join together with other fractional shares to equal one whole share before it can sell. This limits the amount of trading the average investor can engage in.

Since you’re trading a smaller amount of stock, you may incur additional fees, too. You may not have to pay fees for a mutual fund or ETF, but you could have to pay brokerage commissions for shares bought and sold. While some firms don’t charge commissions, others may have high costs associated with fractional share investing.

How to Invest in Fractional Shares

Now that you understand how fractional share investing works, let’s discuss where you can find this investment option. Not all brokerage firms offer this method of investing to their clients. Due to the growing popularity, new firms and apps are offering fractional share investing platforms that can match almost any budget. Here are a few firms you may want to consider.

M1 Finance: Investors Looking for Flexibility

The M1 Finance app offers investors two options. The first is to build your own tailored portfolio. If you’re uncomfortable with that option, you can select the other option and enjoy a pre-made portfolio of different stocks and funds. You can set specific percentage amounts on your account and then buy stocks to match those percentages. Investors also have the option to open an account and buy fractional shares on their own without an extra charge.

M1 Finance splits every share into 1/100,000 of a share so your trade amounts can better match your portfolio targets.

Betterment: Tax-Efficient Investors

Betterment offers fractional share opportunities through curated portfolio strategies. With Betterment, investors can invest in thousands of international companies. This variety of investments can help you create more diversity in your portfolio. It could also possibly assist in minimizing your risk exposure.

Betterment also conducts tax-loss harvesting on all investment accounts. This feature makes this app an attractive choice for investors who want to focus on both tax-efficient and fractional share investing.

Stash: Brand New Investors

Stash caters its investment platform to beginners. This app also provides educational content and connects individuals with a company coach. The coach provides beginners with guidance on their investment decisions. The responsibility of creating a diverse profile is up to the individual. However, the Stash coach can help beginners understand how to select a properly diversified portfolio.

Since Stash offers fractional shares, you can start investing with only $5. With over 200 investment options, you can create a diversified portfolio of your choice.

Stockpile: Kid or Teen Investors 

Stockpile also allows you to start investing with as little as $5. You can then start trading at 99 cents per trade. You can select from over 1,000 fractional shares of stocks and ETFs. With the Stockpile app, you can take mini investing lessons to help improve your investment knowledge.

Also, Stockpile allows you to give an e-gift or gift card to redeem for the purchase of stock. This could be a great way to give your teens and young adults a jumpstart on their financial journey.

The Bottom Line

Here's what you need to know about fractional share investing.

Fractional share investing can be well-suited for investors who are just starting out and want to invest in pricey stocks. Keep in mind, a high stock price doesn’t always make it a successful investment. It’s wise to use other metrics, like a company’s market capitalization, when evaluating the strength of an investment.

Investing Tips for Beginners

  • Learn how investing money can help you grow your wealth. Use an investment calculator to determine the potential returns you can earn over time.
  • Start investing from the comfort of your home through online brokerage accounts. There are many to choose from so consider all of your options before choosing the right one for your financial situation.
  • If you’re struggling to decide how to invest your assets, consider talking to a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.

Photo credit: ©iStock.com/woraput, ©iStock.com/vgajic, ©iStock.com/Filograph

Ashley Chorpenning Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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