Investing is an excellent way to earn money passively, but some people are unable or unwilling to meet account minimums or afford whole shares. A great solution to this problem is a fractional share. Fractional shares are exactly as their name suggests; a fraction of a share. Purchasing these shares is known as fractional share investing.
This type of share allows investors to purchase stock according to their chosen amount of money rather than for the price of whole shares. In turn, this allows investing to be available to many more people.
Besides just those who will not, or cannot, meet account minimums, fractional shares are an excellent option for investors who wish to build up a portfolio that’s very diverse but is working with limited capital.
How Fractional Shares Work
People are often curious as to exactly how to buy a fraction of a share, as well as how it works. Simply put, fractional shares are purchased via dollar-based investing, a process where the amount of money that’s being invested in a company determines the number of shares (or fraction of them) that ends up being purchased.
Many brokerages that offer the option of fractional share investing (such as Webull) also offer the benefit of commission-free trading. This means that when an investor purchases or sells a partial share, they won’t have to pay transaction fees or commissions. Commissions usually mean that transacting partial shares isn’t worth it because the investor would be required to earn a significant rate of return in order to cover the trading costs on their partial share transactions.
The Rules of Shares Also Apply to Fractional Shares
Investors who purchase fractional shares are treated the same as investors who purchase full shares. This means earning the same percentage of profit, taking on the same risk of loss, and enjoying the benefits of stock ownership. The only thing that changes is the amount of all the aforementioned.
Additionally, an investor purchasing fractional shares of a dividend-paying stock would also receive payments, that depend on how many shares, or how much of a share, that they own. For example, if shareholders were paid $5 for each share that they owned, then an investor who owned half a share would receive $2.50.
Selling fractional shares would follow the same process as selling whole shares. All it requires is placing a sell order with the same broker as the fractional shares were purchased from, and then cashing out holdings.
The Pros of Fractional Shares
Fractional shares mean that no company is inaccessible to investors any more. Investment decisions aren’t so heavily based on the amount of money that an investor has, but more on which companies the investor believes in or wishes to own.
Before fractional shares, investors who were limited by the amount of money that they had usually had to resort to penny stocks. Penny stocks were usually made available by unheard-of companies that came with high risk and usually turned out to be bad ideas and worse investments.
Fractional shares are small pieces of really any business that’s publicly traded, even some of the United States’ largest companies.
More Affordable Portfolio Diversification
Beyond just accessibility and safer investments, fractional shares are also a lower-cost route to the diversification of a portfolio.
Portfolio diversification offers many benefits to investors, but the biggest benefit is that not all of their money is in one place. Fractional shares make diversification much more affordable, and bring the risks associated with buying shares much lower.
The Cons of Fractional Share Investing
Many who invest in fractional shares are new to investing. Even if they are not, fractional shares and their affordability mean that people are often reckless with their investing. Some investors don’t research sufficiently before choosing to invest in certain fractional shares, and in the long run, end up losing a lot of money.
Investors should always be careful before making financial decisions, but fractional share investments are particularly easy to be careless with.
Not every stock or ETF offers fractional shares.
In the same vein, fractional share investments can be addictive. The small losses and low barriers to entry mean that there is a fine line between clever investing methods and being unable to stop oneself from purchasing any stock that looks good because of the promise of multiple returns, no matter how small.
Companies whose share prices are high could experience the prices of their shares being inflated since retail investors are able to buy their shares, unlike before. Stocks whose prices are inflated are usually undesirable investments, and an expensive stock isn’t always a good investment.
Should You Buy Fractional Shares?
Fractional shares are a great investment option for anyone, but especially those with limited funds or beginner investors. As with all investments, they should be considered carefully and be well-researched before any financial commitments are made.
Where to Buy Fractional Shares
Buying fractional shares has to be done on a trading platform that offers the option. Here are some examples of sites that offer fractional share trading:
Many of these sites (Webull included) charge zero commission on trades.
How to Buy Fractional Shares on Webull and Other Trading Platforms
Buying fractional shares is usually as simple as submitting a regular order. It really just depends on the procedure of a particular site or platform.
On Webull for example, for as little as $5, all it takes is checking for the fractional share indicator (located at the top of a stock page) to see whether or not that particular stock or ETF offers fractional shares. The minimum amount of shares per order is just 0.000001, with a minimum purchase quantity of just $5 to own a part of a stock or ETF.
Featured Image: Twenty20