A while ago, it was impossible to divide a company’s ownership beyond one share. But fractional share investing has changed that, allowing investors to buy and trade less than a whole share. But should you latch on to this recent innovation in the stock market?
Buying and trading fractional shares can be advantageous in five ways:
- It gives investors access to more investment opportunities.
- It makes it easier for new investors to enter the market.
- It facilitates portfolio diversification.
- It gives investors more control over their investment strategy.
- It puts an investor’s every dollar to work
Read on for an insightful discussion as I shed more light on the above benefits of buying and trading fractional shares.
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
5 Reasons Buying & Trading Fractional Shares Is Worth It
Described below are the top five reasons that make buying and trading fractional shares totally worth it:
Fractional Shares Give You Access to More Investment Opportunities
Trading fractional shares gives you a chance to invest in companies that may be impossible for you to invest in through whole shares.
How? Let’s look at an example.
Suppose you have $250 set aside for investment. You’re looking to invest in company XYZ because its shares seem attractive in terms of the price/earnings ratio, the earnings per share, the beta, or any other stock evaluation merits you may be using.
Through your analysis, you’ve established that this company’s stock ticks all your boxes. One problem, though: XYZ’s per-share price stands at $1000, four times the size of your capital.
If buying a fraction of a share wasn’t possible, you’d have to either find a way to raise your investment capital to $1000 or forget about investing in this particular company altogether. But that’s a thing of the past now, all thanks to fractional shares.
By allowing you to invest as little as you can afford, trading fractional shares allows you to bypass one long-standing challenge for many stock market investors: prohibitive share prices. This is particularly helpful if you have limited funds because it means you can invest in more companies, including those with pricey shares like Amazon.
Novice Investors Can Break Into the Stock Market With Fractional Shares
When you are new to stock markets, you may not have enough capital to build a stock portfolio (never mind a diversified one) by trading whole shares. You may also not be well-versed with the intricacies of stock trading. Sometimes, it’s both.
Trading fractional shares may address both barriers to entry by:
- Lowering the minimum amount needed to start trading
- Allowing you to learn and practice stock trading with less money at stake
Let’s discuss each benefit separately.
You Can Start Trading With Little Investment
Buying a slice of a share costs less than buying a whole share. Some brokerages let you get started with less than $10 if you opt for fractional shares.
Take Shwab, for instance. On this platform, investors can start trading share slices with as little as $5. Fidelity also offers this kind of dollar-based investment in stocks with an even lower limit of $1!
You Learn and Practice Stock Trading With Less Risk
Trading fractional shares isn’t any different from dealing in whole shares in terms of the risk. You can lose money if you don’t make the right calls.
“Making the right calls” in stock trading is easier said than done, especially if you’re new to the market. It requires both knowledge and intuition (or, as some may prefer to call it, “relying on your gut feeling”). And in case you doubt the latter part of that statement, research has confirmed that gut feelings contribute to the success of a stock trader.
Sure, you can learn the theory of stock trading from your resource of choice. You can also have someone explain everything to you and even try your luck with a virtual account. But the adage “experience is the best teacher” holds for stock trading.
Don’t get me wrong: I’m not saying that you shouldn’t read about investment ideas and learn the theory behind the core stock trading concepts. On the contrary, I’m advocating for supplementing all that information with firsthand experience for better understanding. This way, you not only enhance your knowledge but also develop trading intuition.
Now, as you experiment with different strategies as part of your learning process, you’re bound to make some mistakes. Some of these will be costly in terms of losses.
This is where trading fractional shares comes in handy.
Because you’re dealing in portions of a share, you won’t need as much capital as someone whose portfolio comprises whole shares. Thus, there’s less at stake, and any costly mistakes you make won’t make too big of a dent in your finances.
Fractional Shares Give You Better Control Over Your Investments
Dealing in fractional shares allows you to set an investment budget and stick to it. If you’re only comfortable investing, say, $100 in shares of a given company, you can go ahead and do that regardless of its share price. Even if the shares are trading at $300 each, you can always buy a third of a share.
Moreover, as I mentioned earlier, you’re free to choose shares that you actually want to hold in your portfolio (as opposed to being limited to only the shares you can afford).
Let me explain.
When a high share price is no longer a stumbling block (because you can buy share fractions, remember), you have more room to maneuver when selecting the stock you want to include in your portfolio. You can hold as little of the more expensive shares in your portfolio as your capital allows, possibly alongside more significant fractions (or even whole shares) of the cheaper ones.
With this kind of control, you can be more choosy with what to hold in your portfolio and fine-tune its components to align with your investment goals and strategy.
Fractional Shares Facilitate Portfolio Diversification
Each share you buy comes with a certain amount of risk. And in most cases, higher risk means more lucrative potential returns. The keyword here is “potential” because returns are never guaranteed.
Essentially, stock investors strive to maximize returns while minimizing risk. There are several ways to go about this, and diversification is top of that list.
How does diversification reduce risk? Let’s use an example.
Let’s assume you only have airline shares in your portfolio, and something significant like an indefinite employee strike happens in that industry, cancelling all the flights. In that case, airline shares will lose their value, and your portfolio will take a large hit.
Now, if your portfolio included a mix of airline and healthcare shares, only a fraction of your portfolio would be affected by the sudden drop in share value.
From the above example, it’s easy to see the significance of diversifying your portfolio as much as you can. The problem is, you need significant investment to own stock in multiple industries, and this is where fractional shares come in handy.
When you don’t have to fork out the full share price, you can buy shares from several industries even with a modest budget. This way, you can diversify your portfolio to your liking and mitigate your risk.
Fractional Shares Put Your Every Dollar to Work
To illustrate, let’s use an example.
Assume your capital is $1000. You’re looking to put that entire amount to work by investing in shares and have identified A, B, and C as companies whose shares you’d like to have in your portfolio. Their shares are currently trading at $200, $150, and $100 per share, respectively.
Your priority is to buy two shares of company A and three shares of B. Once these are acquired, you can use the remaining capital to purchase shares of company C.
Working strictly with whole shares, you’d only be able to invest $950 (i.e. (2*$200)+(3*$150) + (1*100)). This would leave $50 lying idle in your account. But with fractional shares, you can put that extra $50 to work by purchasing a fraction of one of these three shares.
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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