Day trading is a popular way of making money from the markets. With more people becoming aware of fractional shares, there’s often confusion on whether buying and selling fractional shares qualify as day trading. What’s the reality?
Yes, fractional shares can count as day trades if they are bought and sold within the same trading day. All FINRA pattern day trading rules are applicable to fractional shares, the same way they are to whole shares. Considerable capital requirements for day trading, makes day trading unviable for most fractional share traders.
In the rest of this article, I’ll take a quick look at fractional shares and everything you need to know about becoming a day trader in this niche.
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!
Table of Contents
What Are Fractional Shares?
Fractional shares are a small portion of whole shares. These shares make it easy for traders to buy a tiny percentage of a share instead of trading whole units. You can now buy $1 worth of some of the most popular shares in the world—including those that cost $3000+ per share.
Why Are Fractional Shares Not Day Trades?
Think of fractional shares as a type of shares and day trades as specific types of trades. The terms mean different things. If you’re thinking about opening and closing fractional share positions as day trading, then it gets a bit tricky.
Ordinarily, the average fractional share investor will buy the slices of shares they want from various companies and hold them for as long as possible before selling them to cash in any profits generated. On the other hand, a day trader in the stock market may buy a stock any time during the day and close it out (sell) before the end of the same trading day.
So, for fractional shares positions to qualify as day trades, they have to be bought and sold the same day in line with the dictates of the Financial Industry Regulatory Authority (FINRA). This presents a different set of challenges.
Day trading stocks in the US is capital intensive. The minimum legal requirement to qualify as a day trader is handling a minimum of $25,000 in it. If your account balance falls below this sum, you can no longer open and close trades within the same day. Therefore, you’ll need up to $35,000 to realistically think of day trading fractional shares.
Most brokers offer up to 4:1 leverage on day trades, so $35,000 can allow you to enter trades worth up to $140,000.
Is Day Trading Fractional Shares a Good Idea?
Day trading fractional shares is a good idea if you know how to find good trading opportunities in the market. It allows you to capitalize on the daily micro-movements of some of the more volatile stocks, taking good advantage of your trading capital.
Buying a portfolio of fractional shares worth $35,000 and holding it for a year may yield a market-beating return of around 20-50% at the end of a year. A savvy day trader using the same trading capital and some leverage can generate 2-3 times that return.
What Do You Need To Start Day Trading Fractional Shares?
To start day trading fractional shares, there are a few boxes you need to tick—besides having enough capital. I’ll look at them below:
Time To Trade During the Market Hours
If you have a day job that will make it difficult for you to stay close to your trading station when the New York market opens and closes, you’re likely to struggle with day trading. You’ll need to trade actively during this period from Monday to Friday. If you can’t consistently trade during this window, you may have to rethink your desire to become a fractional shares day trader.
Excellent Knowledge of Technical Analysis and Day Trading Lingo
Your ability to succeed at day trading comes down to just how well you can perform in the markets every day. If you attempt to day trade fractional shares without getting the right education, there’s a high possibility that you’d lose your deposit very quickly.
Dedicate some time to understanding technical analysis and all the day trading terminology you need to know. There are many resources online—including free videos—that can help you have some grasp of what the industry entails. However, keep in mind that understanding basic terms doesn’t make you ready to become a day trader.
A Profitable Trading Strategy
Technical analysis is all about finding a strategy for entering and exiting trades in a way that gives you a better shot at long-term profitability. You need to find a strategy you can count on before you’re ready to risk your money day trading fractional shares.
The strategy creation process can take a lot of time—sometimes many years. Some people try to cut down the learning curve by going with a strategy created by someone else. However, this opens a new set of challenges. How do you verify the authenticity of the results claimed? How are you sure the trader makes money with the strategy?
If you find a genuine strategy that works, you can master it and deploy it like the original owner intended or make adjustments to suit you. If you modify the strategy in any way, take the time to run a comprehensive backtest and make sure your new changes haven’t negatively affected the profitability.
Once you’re satisfied with the backtest results on your chosen strategy, it’s time to put it to the test in real market conditions. At this stage, you still shouldn’t jump into trading your live funds.
Success on a Demo Account
Before you start day trading fractional shares with any strategy, you need to see how it works in forward tests. Regardless of how much you’ve studied and how much work went into developing a strategy, backtests aren’t the same as forward tests.
Many people make the mistake of funding an account and trading straight away at this stage, but that increases their chances of losing money. You need to practice until you can execute positions in the market effectively. Having book knowledge is one thing; consistent practice is another.
Sign up with brokers offering demo accounts and practice day trading for at least one month before you start thinking about risking live funds. If your preferred brokers don’t have a demo account, you can search online for a free or affordable day trading simulator.
Only move to live trading after you’ve made some money on the practice account and cultivated a strong understanding of how the market works overall. If your strategy doesn’t work well enough on a practice account, it won’t get better in real market conditions.
What Are the Alternatives to Fractional Shares Day Trading?
If the requirements for becoming a day trader, as I’ve discussed above, are unrealistic for you, there are other alternatives you can go with:
Trade Other Markets
The CFD forex market is an example of an alternative to fractional shares day trading. The legal deposit requirements aren’t as stringent, and you can get leverage of 1:50. Also, the market is open round the clock all week round.
Buy and Hold Fractional Shares
If day trading is too complicated for you, it’s best to buy and hold fractional shares and sell them years, months or days down the line for a profit. This is as long as you’ve chosen good value stocks with great potential.
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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- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
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Conclusion
Fractional shares trades don’t count as day trades unless you buy and sell them within a trading day. But, all FINRA pattern day trading rules that apply to whole shares, are applicable to fractional shares as well. While there are some benefits to becoming a day trader, it’s not for everyone. The technical, financial, and legal requirements may pose a strong challenge for inexperienced retail traders, especially those with small trading accounts.
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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For many, a buy-and-hold portfolio of fractional shares in high-quality stocks is often a better route to go.
