When you want to buy shares of a big brand like Google, their hefty prices may discourage you unless you’ve set aside a substantial amount to invest. Buying fractional shares may be an option in such a scenario because it lowers the bar for the minimum investment size. But can you build substantial wealth through this strategy, given the smaller size of investment?
Fractional Shares can make you rich in the long run because they allow you to start trading earlier, to benefit from the success of established brands with pricey stocks, to invest consistently, and to grow your portfolio without additional investment.
In this article, we’ll explore how fractional shares work, and the different ways they can help you build wealth. We’ll also discuss two critical things to consider prior to investment.
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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The Lowdown on Fractional Shares
Fractional shares have a pretty self-explanatory name. When you acquire one of these, you own a portion of the stock in question (as opposed to owning a full share of it).
To clarify, here’s an example:
Suppose stock X is trading at $500 per share, but you’ve only set aside $250 to invest. Instead of forgetting about stock X because you can’t afford one whole share, you buy a fraction of the share. In this example, you can afford to buy a half.
This, in a nutshell, is how fractional shares work. As you may have gathered from the above example, this method of investing offers access to stocks that would otherwise be out of your reach due to their hefty share cost.
Can You Get Rich With Fractional Shares?
If you look at the big picture, it’s possible to build wealth through fractional shares. But unless you’re working with sizable capital (in which case, you may be better off buying full shares), fractional shares aren’t a “get-rich-quick scheme.”
So, how exactly does purchasing fractional shares help build wealth? Several ways:
- It allows you to get started on stock trading as early as possible
- It allows you to benefit from the success of established companies, whose stocks are often priced prohibitively
- It facilitates consistent investment
- It may help you to grow your portfolio without additional investment
Let’s dissect each of these statements independently.
Fractional Shares Allows Trading To Start As Early as Possible
With fractional shares, you don’t have to wait until you’ve saved enough to purchase a full share of your preferred stock. Rather, you can buy a portion of it and dip your toe into stock markets earlier than if you waited until you could afford your first full share.
Getting started on stock trading as early as possible has one key advantage: It gives you more time to learn stock trading.
I’m not talking about just learning the basics through theory一 though it’s an okay starting point. Instead, I’m talking about acquiring the kind of knowledge and instinct that can only be gained through experience—in other words, developing a strong “gut feeling.”
The best traders don’t just rely on algorithms; they also lean on instinct. In fact, a Cambridge study has established a positive link between financial success and a stock trader’s ability to read and utilize his/her gut feelings.
Starting trading earlier provides more time to develop this kind of instinct. Plus, it puts you in a better position to avoid huge losses (and make serious profits instead) once you start investing significant sums of money in stocks.
Fractional Shares Provides Access to Stocks of Large Companies
More often than not, stock for established, high-performing companies will be priced so high you may not be able to afford it.
In most cases, such stocks provide better returns in terms of dividends (if that’s how you’re looking to benefit from buying shares). They’re also less volatile in general, meaning they carry less risk for someone looking to buy and hold.
Fractional shares provide access to these expensive stocks. Even though you may not be able to afford a full share for a particular high-performing company, you can benefit from its financial success (albeit in a smaller way) by purchasing a fraction of its shares.
Fractional Investing Adds Consistency to Investment Plans
Consistency is crucial when investing in stocks to create significant wealth in the long run. Fractional investing helps facilitate consistent investing, which is needed to grow and diversify your portfolio and generally set yourself up for success.
Having fewer constraints on how much you need to get started with fractional shares means you can set aside a small amount to invest each month as your earnings allow. Once you determine how much you can afford to invest each month and still cover other expenses, you can create an automatic plan to ensure you stay on track.
This kind of consistency can help you build wealth in two ways:
First, it helps you build a habit of allocating a specific portion of your earnings to investment. This is an important discipline to have if you want to build significant wealth through stocks and other investment types.
Second, setting up your portfolio and watching its growth over time can motivate you to allocate more of your earnings to investment. Even if you can’t set up extra revenue streams for that purpose, chances are you’ll find ways to work around your budget and increase the amount you set aside. All things constant, a larger investment equals more significant earnings, so this is great for building wealth in the long run.
Fractional Shares Help Stocks Grow Without Additional Investment
Provided you choose fractional shares for dividend-paying stock, you’ll always be eligible for dividends, same as those holding a full share. The difference is that you’ll receive a smaller amount than investors owning a full share.
When you’re eligible for dividends, you have two options for how you can receive them. You can either opt for a cash payment or use your dividend to acquire more stock through a setup known as dividend reinvestment. In order to grow your portfolio without additional investment, it requires the latter option.
Through dividend reinvestment, you can purchase more stock with each payout and avoid investing anything out-of-pocket. Some brokerage firms even permit this process to be automated, such that all your dividends go to acquiring certain, predetermined shares.
The beauty of dividend reinvestment is that each fractional share acquired increases the subsequent payout, meaning you have more to reinvest every time dividends are paid. With enough time and some smart choices, this self-perpetuating cycle can see you eventually buying whole shares.
Two Critical Considerations Before Investing in Fractional Shares
Consider the following before you purchase fractional shares through any brokerage firm:
Availability
By availability, I mean two things. First is whether your brokerage firm allows fractional share investing. The second is whether this service is available to all customers. Different firms have different policies, so be sure to contact yours to find out these two critical things before investing.
Types of Securities Acquirable Through Fractional Investing
Again, this depends on your brokerage firm’s policy. Some firms only allow the buying and selling of particular securities through fractional shares. Others only allow the buying/selling of fractional shares for stocks. Still, others may allow it for both Exchange Traded-Funds (EFTs) and stocks.
Additionally, there may be limitations on the types of EFTs and stocks you can buy/sell fractional shares for. If your brokerage firm allows fractional share investing for either or both security types, guidelines will exist, so ask to review these before putting your money into anything.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
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Conclusion
As we’ve seen throughout this post, you can potentially build wealth through fractional shares. However, this investment strategy will require patience, as it’s not a “get rich quick scheme.”
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!
Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.
