If you’re looking into day trading, you might be thinking about fractional shares. Contrary to high priced whole shares, you can day trade fractional shares with just a handful of dollars. However, you must fully understand the nuances of day trading fractional shares before putting your hard earned money at risk.
You can day trade fractional shares, but they tend to be harder to sell. These stocks have less demand, and they are not available for every company. Nonetheless, since fractional shares are a partial percentage of a whole share, they allow you to invest precise amounts, and day trade a small account.
If you’re interested in day trading using fractional shares, you can get started with as little as five dollars! But, as mentioned above, before putting your money to work with these instruments, you’ll want to learn more about the liquidity of fractional shares and more. Here’s everything that you need to know!
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Table of Contents
What Are Fractional Shares?
Before you make money off of fractional shares, you should understand them. This stock type is a great way to diversify your portfolio further, even if you don’t have much money to invest. It is beyond doubt a really good trading option for beginners.
In essence, a fractional share is a percentage of a whole share. Trading these shares allows traders to buy a section of the whole share, and invest the precise dollar amount that they want to invest in a particular position. Fractional shares have made building diversified portfolios possible for small investors.
In other words, you can think of a fractional share as just a part of a whole share. This option makes it possible for beginner day traders to work on even a smaller budget. However, you’ll probably want to move onto full shares eventually.
Liquidity and Fractional Shares
When buying fractional shares for day trading, you want to make sure you’re getting ones that have the least amount of liquidity needed to close out any trading positions you buy into. Fractional shares don’t always offer immediate liquidity. That means you may not be able to trade them as quickly as a whole share. Occasionally, when trading some low volume stocks, you might also need to gather enough fractional shares to buy a whole one.
Furthermore, some brokerage firms might apply additional fees when you buy or sell fractional shares. You’ll always want to calculate that into your investing strategy, so you can still turn a profit. It’s in your best interest to ask about various fees, so you can find brokers that don’t have them. Overall, you’ll need to understand liquidity to ensure you’re making good trades.
Defining Financial Liquidity
Stocks and bonds are easy to convert into cash, making them liquid assets. According to Investopedia, financial liquidity is the measurement of how easily you can exchange assets you own for money.
Before you invest in any type of stock, make sure you know their liquidity levels. You want to know how long it will take to turn your assets into money, especially as a day trader. In short, liquidity refers to how quickly assets can be bought and sold.
Are Fractional Shares Liquid?
You must understand the liquidity level of a fractional share before you buy it. Some brokerage firms say that they can’t guarantee the liquidity of a fractional share – even shares that are completely liquid.
Fractional shares can be liquid, but not always. If they aren’t, you could lose money on the investment. Not every fractional share offers immediate liquidity; you may need to wait. Brokers often collect fractional shares before trading the whole share, which makes the process slower for you.
Although this is possible, not every brokerage firm will make buying and selling fast and easy. You’ll need to look into these firms and make sure you’re getting the services you want. As a day trader, you want the most liquid assets possible so that you can sell them all at the end of the trading day.
Daytrading and Fractional Shares
Fractional trading can be a good strategy for day traders, whether or not you have a lot of experience. As long as you make sure to consider the liquidity of your investments, you should be good to go.
Fractional shares allow you to trade stock based on how the company performs; thus, you don’t need to worry about how much money you have in your accounts. Because of this, it’s still possible to build a robust and diverse portfolio with limited budgets. However, you always want to be aware of likely broker’s fees and other charges first.
The Pros and Cons
Several different pros and cons come with day trading fractional shares. You’ll want to weigh both sides before you invest in these stocks. Here’s what you should consider:
Pros
- You can trade with smaller amounts of funds.
- There aren’t minimum balance requirements.
- You can work with precious stock.
- No company stock is too expensive.
- You trade based on the performance of the business.
- You can easily create a diverse portfolio.
- Not all of your money goes into a single stock.
Cons
- There may be more and higher fees.
- Brokers might charge additional charges.
- They aren’t available everywhere.
- Not all stocks have fractional shares.
- You might need to go through a broker that isn’t your first choice.
This YouTube video breaks down more pros and cons when it comes to fractional shares. It also answers some questions that you might have about these types of stocks:
Is It Worth Trading Fractional Shares?
You’ll want to be aware of all the pros and cons, as well as your trading styles. Of course, you should find options that offer as little fees as possible. Many people consider fractional share trading worth it, but it depends on your preferences.
Trading fractional shares is worth it if you can’t trade whole shares. Fractional shares are a great start if you desire to get into day trading but don’t have enough money for full stocks. You can also invest very precisely into the companies you want.
Overall, the benefits are well worth it for many investors. However, it’s not always worth it if you can afford to day trade whole shares. You’ll want to consider your budget and what options are available to you.
If you want to invest a smaller amount of money, the book Investing Champion: How to Invest $100 (available on Amazon.com) should help you. The author discusses ways to invest when you don’t have thousands of dollars set aside. It also offers information on how to invest the money you get from your investments to make even more money later.
Fractional Shares and Dividends
Many people also wonder if fractional shares pay dividends. If you have a fractional share that pays dividends, you receive a smaller payment based on how much of the share you own. For example, if shareholders get a dollar per stock and hold a fourth of a share, you’d get $0.25.
If you’re a day trader using a dividend capture strategy, you could benefit from a fractional share’s dividends. You won’t make as much income as you would using this strategy with whole stocks, however. As a day trader, you probably won’t want to invest long-term, so make sure you sell after the ex-dividend date passes.
Author’s Recommendations: Top Trading and Investment Resources To Consider
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Conclusion
When it comes to day trading, it’s possible today to trade fractional stocks. There are many benefits, including investing in well-established companies without having to pay for the entire stock. However, you may have to pay for additional broker’s charges and fees.
As long as you take the time to consider what you want from day trading, you always should make sure to seek out investments that suit your needs. Overall, many people practice day trading fractional shares. You could also benefit from trying it!
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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