Purchasing fractional shares, also known as dollar-based investing, is an excellent way for investors with limited funds to enter the stock market. While the ability to intentionally purchase fractional shares has only recently gained popularity, it is just the thing many millennials and even some savvy Gen Zs need to get them started with creating diversified investment portfolios and building wealth.
You can purchase fractional shares of all stocks in any publicly traded company through brokerage firms. Fractional shares are any slice of stock that is less than a whole. These pieces of stock happen organically in all portfolios through dividends and capital gains.
The rest of this article will explain a few topics related to this question in great detail, including where and how to purchase fractional shares, why fractional shares are a good investment strategy, and caution to observe when adding fractional shares to your portfolio.
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Where and How To Purchase Fractional Shares?
Purchasing fractional shares is an excellent investment strategy; however, brokerage firms are the only financial institutions that allow intentional fractional share purchases.
Fortunately, many firms such as Public and Robinhood realize that even though keeping up with fractions of shares can be a bookkeeping nightmare, it can also be the bread and butter of the organization because it allows the majority of Americans a starting point in the market.
Most brokerage firms allow investors to purchase shares in any publicly traded company for between $1 and $5 per fraction. Because these firms are FDIC-insured, they require a similar application process to traditional banks like JP Morgan and Chase or Bank of America. Many also have a host of other financial services available for account holders.
Once your application is approved, which can take between an hour and several days, you fund the brokerage account by linking your existing checking account to the brokerage firm. Then, you initiate transfers between the accounts.
There are generally no minimum account requirements, and you can elect to fund the brokerage account on occasion or set up automatic deposits. As opposed to traditional investment firms, the other benefit to brokerage firms is there are usually zero commissions and no trade fees.
Finding these brokerage firms can be time-consuming, so we have put together a list of the best options for beginners. All of these platforms offer free trades and zero commissions, and are user-friendly, so they are perfect for young investors.
5 Best Brokers For Fractional Share Trading
Listed below are the five top brokers that allow fractional share trading and you cannot go wrong with:
Public
This firm’s claim to fame is its social investing feature. Investors have access to Public’s social networking feed where members post questions, the information they learn about stocks, reasons for buying or selling, etc. They can also react to member posts and follow their portfolios.
Robinhood
Robinhood was one of the first to offer fractional investing and zero trades/commissions, and though still popular, they have received bad reviews for their handling of the 2021 GameStop frenzy.
Even so, Robinhood is suitable for beginners and has room for advanced investors with their Gold Accounts. Robinhood Gold Accounts is a subscription service that for $5 per month gives members access to research and other market data along with the ability to trade on margin. This service has a 30-day free trial period.
SoFi
SoFi is a complete banking system best known for student loan refinancing, but they have a robust investment platform. Investors can choose stocks in companies they believe in, or set their risk tolerance and have SoFi automate the portfolio.
Webull
WeBull is comparable to the other firms, and they offer two levels of service. The first is free, Level 2 is a subscription, but investors can get a 3-month complimentary subscription that allows them access to Nasdaq TotalView.
In addition to being user-friendly and a sound starting point for beginners, all these platforms, except Public, offer both desktop and mobile platforms. Nevertheless, Public’s lack of a mobile app does not impact its ability to help investors achieve financial goals.
Moreover, because interest in firms that allow fractional share purchases is growing, these firms often offer shares of stock for new account owners, so investigating current promotions is a worthwhile investment of your time.
Why Fractional Shares Are a Good Investment Strategy?
Investment portfolios are typically managed by investment companies that invest your money for you based on your risk tolerance. Although fractional shares become a part of those portfolios, these companies do not intentionally purchase fractions for customers. They also generally require the cost of a whole share in a company before you can open an account, which means their account minimums are typically between $1000 and $10,000.
This refusal of larger firms to purchase fractional shares for client portfolios means average investors cannot invest in companies like Tesla (TSLA), which currently trades at over $700 per share, Google (GOOGL), which trades at $2,354 per share, or Amazon (AMZN) which trades at nearly $3500 per share. In order to do so, you would have to save up for a full share, and many investors prefer not to wait that long.
Likewise, few people, particularly young investors, can invest that much money into the stock market and still diversify their portfolios. By allowing investors to purchase slices of whole shares, brokerage firms enable younger investors to enter the market and begin building wealth sooner.
Fractional shares are a good investment strategy for many reasons, but the following are three of the best reasons that make fractional shares a sound investment strategy.
- Diversification. This risk management strategy is the most significant financial benefit to using the fractional share investment strategy. It allows you to follow your grandmother’s advice and refuse to put all of your eggs in one basket so that when one stock loses money, the other stocks hopefully gain to balance the investment.
- Access. Without the benefit of intentional fractional share investments, young investors would have to wait until they could save for an account minimum, which ranges from $1000 to $10,000. Waiting to save for the minimum is time lost in potential earnings.
- Education. This benefit is invaluable. Fractional share investments allow young investors to have a hands-on approach to learning how the stock market works.
Caution To Observe When Purchasing Fractional Shares
Some disadvantages to purchasing fractional shares include the inability to vote because voting rights are most often granted based on whole shares. If the ability to vote for how a company makes decisions or what they invest in, etc., is essential to you, see if your desired brokerage firm allows fractional voting.
Possibly the most significant disadvantage to purchasing fractional shares is that they are not transferable. This fact is a good thing for brokerage firms but often a surprise to investors.
Basically, suppose you are with a brokerage firm like Stash, and you want to transfer to a different brokerage firm. In that case, the first firm will liquidate your fractional shares, and let you transfer the cash earned from the liquidation. Then, the new firm reinvests that sum.
Overall, most young investors stick with the brokerage firm they begin with, which is why so many financial firms are starting to see the benefit of offering fractional share purchases.
And while having a say in company matters is essential for all investors, it is secondary for beginning investors who simply want to start somewhere. Therefore, even with the few disadvantages to owning fractional shares, for young or new investors, fractional or dollar-based investing is a sound strategy.
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Conclusion
It would be perfect if everyone had the money to purchase whole shares of any company they believe in, but financial matters seldom work that way. The ability to invest in smaller pieces of stock is a way of leveling the playing field so that young investors can enter the market, building wealth sooner. So, since you can purchase fractional shares of any company through brokerage firms, it does not make sense to wait on building your portfolio.
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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