Many people avoid investing in the stock market because they believe they do not have the money to invest. Shares in companies they believe in are often too pricey, and taking a chance on an unknown startup or less known company feels like too much of a risk. So, many times, people just do not invest, and more often than not, they lose out. But can you own shares in these popular companies without having thousands of dollars to invest?
Fractional shares are profitable for investors with smaller accounts. They provide investors the flexibility to invest in potentially profitable companies with high share prices even when they lack funds to buy whole shares of these companies.
The rest of the article will dive deeper into the concept of fractional shares and how regular investors can benefit from them. With the introduction of fractional trading, gone are the days when small investors need to save money for months to buy high-priced stocks of companies they truly believe in. So, without further ado, let us jump straight into the subject and understand the ins and outs of factional trading.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
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What Is a Fractional Share?
In a way, fractional shares are a novice investor’s dream, and for many, they are the best way to enter the stock market. Fractional shares are exactly what the term implies: a fraction of a share in a company. In this bull market, we have enjoyed for the past decade, many stocks are well over $100 per share, and the giants are upwards of $3000 per share.
These prices make it almost impossible for beginning investors to purchase just one share of stock in a company like Amazon or Tesla. Even if the time spent saving for the whole share does not deter you from trying, you lose money because you lose the dividends you could make. Therefore, the option to buy fractional shares allows investors to begin earning money sooner than if they had to save up for the whole share.
How Do Fractional Shares Work?
To understand how fractional shares work, you must first understand how the stock market works.
You basically purchase shares in a company, and outside of the potential to sell these shares at a higher price, that company gives you part of its profits in the form of dividends based on the number of shares you own. As mentioned, though, the price of many stocks is prohibitive for many Americans.
Fractional shares solve this problem. While you are waiting on your fractional share to turn into a whole share, you are making money and reinvesting those earnings back into the shares.
The main caveat to investing in fractional shares is you can only purchase them through brokerage firms, and not all brokerage firms allow fractional share purchases.
While there are many brokerage options to choose from, many beginning investors like to rely on firms with advisors and portfolio managers. So, they use firms like Charles Schwab or SoFi to avoid dealing with the complexities of the stock market on their own.
Both Charles Schwab and SoFi advertise that you can own stock in any S&P 500 company for “as little as $5.00.”
Though keeping up with the fractional shares can be a bookkeeping challenge, many brokerage firms advertise it because they know these small amounts add up over time, and as investors earn more, they invest more.
Essentially, the financial brokerage company purchases fractional shares for your portfolio, and it keeps up with how many you own. Then, it reinvests your dividends to purchase more shares. Although you could get a dividend check, it would be in proportion to your share, and therefore more profitable if used to build the fraction to a whole share. This transaction is known as DRIP, and eventually, your portfolio has a whole share of that stock.
Benefits of Owning Fractional Shares
The greatest benefit of being able to purchase fractional shares is that you can invest in a company sooner. Bank savings accounts offer very little interest, so after having an emergency fund saved and all debt paid, it makes little financial sense to keep money in a standard savings account.
Moving this discretionary money to the stock market can earn dividends more quickly than a savings account, especially when you allow those dividends to compound.
Another benefit of fractional shares is that they allow investors flexibility in the form of diversification. This flexibility reduces risk while potentially maximizing returns. This means you can purchase small shares of several companies so that if one does not make money, you do not lose as much because the chances are that the other stocks will make money.
Fractional shares add up rather quickly for investors who are disciplined in their goal to own the entire share, and this momentum often has a ripple effect, so fractional share investing can be quite profitable.
How Can Investors Make Money With Fractional Shares?
Although you should definitely let the broker invest your dividends to buy more stock, you should also continue to add money to the account with the goal of owning a whole share within a certain amount of time. Setting a goal like this will make you more disciplined, making the portfolio grow at a steady rate.
Remember, most of the stock market is about timing, so the more consistently you add money to your account, the faster it will add up and the sooner your dividends will grow.
But to make money with fractional shares, or any stock, for that matter, you have to give it time to grow, so resist the temptation to trade unless there is a really good reason to do so.
How To Purchase Fractional Shares?
The only way to purchase fractional shares in any company is through a brokerage firm. Today, there are several to choose from in addition to the brick and mortar firms listed above. Many firms now have an online presence, and others are available as mobile apps only; however, all are FDIC insured.
The main difference between traditional brokerage firms and the new generation of brokers is that most of the newer companies offer robo-advisors that automate investments using algorithms.
In other words, instead of a human helping you assess your risk tolerance and talking you through decisions, a computer algorithm decides which stocks to buy based on your input.
Although this may sound scary, robo-advisors are very intelligent and make optimal decisions quickly. So, the notion of letting a computer create your portfolio shouldn’t make you concerned.
Moreover, in most cases, if personal help is provided, the company also charges a monthly fee, while robo-advisors are often free.
The following American finance companies allow users to purchase fractional shares:
- Robinhood – Founded in 2013, this online startup offers both an app and a web platform. With a zero account minimum, it is easy to start. They do not charge commissions and offer free trades. Fractional shares start at $1 with no monthly fee for the basic plan.
- Stash – Founded in 2015, this online bank allows fractional share purchases starting at $5. It advertises itself as being beginner-friendly but has a monthly fee. They offer a debit card and have an online bank. Stash has a desktop, web, and mobile platform.
- Webull – Founded in 2017, this company is a no-fee brokerage company that has a desktop, web, and mobile platform. They also have a paper-trading program that allows investors to practice and test their trading strategies without investing real money.
- Public – Founded in 2018, this company is different in that it is a social-investing finance company. There are no monthly fees, and trades are free; however, the company did institute an optional tipping feature in 2021. Public has a mobile app but no desktop platform.
Author’s Recommendations: Top Trading and Investment Resources To Consider
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Conclusion
It is easy to see that fractional shares are profitable. They let you get into the stock market sooner and minimize risks by diversifying the portfolio. Although you must use a brokerage firm to purchase fractional shares, the new generation of financial startups offer free trades and zero commissions, which means all your money gets invested in your own account.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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