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The ultimate guide to fractional shares
There was once a time when entry into the financial market was difficult for regular investors. Fractional shares helped to change this in a big way by facilitating the buying and selling of a “fraction” of a share.
DEFINITION
Less than one full share of equity is called a fractional share.
This guide will run through fractional shares in-depth, including examples, pros and cons, and the circumstances in which this feature can be handy.
Big ideas
- Fractional shares can help you to make the most out of your investment allocation - you don’t have to save up the full amount before you buy a high-priced share.
- Fractional shares have helped retail investors access markets that previously had high barriers to entry.
- The ability to trade fractional shares is not a means of profitability in and of itself. It simply allows for increased diversification and flexibility of existing funds.
A fractional share is any share quantity less than one. Rather than owning a total share of stock, you own a partial one – a fraction priced based on its relation to the whole-share value.
For example, if Apple (AAPL) traded at $150 and you own a 0.5 fractional share, your position is worth $75. Stock positions include fractional shares and whole-share quantities, so if you own 1.5 shares of AAPL, your investment is worth $225.
For example, if Apple (AAPL) traded at $150 and you own a 0.5 fractional share, your position is worth $75. Stock positions include fractional shares and whole-share quantities, so if you own 1.5 shares of AAPL, your investment is worth $225.
Fractional shares took on a new meaning in 2019 when trading platforms offered customers the ability to purchase fractions of shares directly. This directly appealed to millennials and younger generations who wanted to make the most of their existing funds, which was likely to be of a lower total volume compared to established market participants.
Fractional shares were initially popularised by trading applications geared towards a millennial audience. But soon enough, larger names entered the fray. Robo advisors, trading applications, and financial institutions now offer fractional shares.
Fractional shares first occurred when the investment world was largely being redefined, with zero-fee trades and crypto products also on offer to lower entry barriers. It also occurred around the same time as an anti-wall street movement initiated through Game Stop stocks.
Fractional shares were initially popularised by trading applications geared towards a millennial audience. But soon enough, larger names entered the fray. Robo advisors, trading applications, and financial institutions now offer fractional shares.
Fractional shares first occurred when the investment world was largely being redefined, with zero-fee trades and crypto products also on offer to lower entry barriers. It also occurred around the same time as an anti-wall street movement initiated through Game Stop stocks.
It’s worth keeping in mind that fractional shares have been around for a long time. Mergers and acquisitions, stock splits, and dividend reinvestment plans often resulted in fractions of shares being left over. These were viewed as something of a nuisance, being difficult to trade.
Fractional shares are also sometimes described as stock slices or fractional shares of stock. The whole share is being divided up into slices. But it’s often not as neat as cutting a pizza.
Fractional shares can sometimes be 1/100,000 of a share. In most instances, however, a high value stock might be in the region of $250 - $500 (Netflix, Costco, Microsoft, etc). So a division might be 5% - 50% for a fractional share of such stocks.
Fractional shares are also sometimes described as stock slices or fractional shares of stock. The whole share is being divided up into slices. But it’s often not as neat as cutting a pizza.
Fractional shares can sometimes be 1/100,000 of a share. In most instances, however, a high value stock might be in the region of $250 - $500 (Netflix, Costco, Microsoft, etc). So a division might be 5% - 50% for a fractional share of such stocks.
It’s easy to explain how fractional shares operate in practice.
EXAMPLE
You might have £1000 to start your portfolio.
However, AutoZone (AZO) has a price of $2,348 per share (April 2023).
Traditionally, this would price you out of the market, and you would have to wait before investing, potentially missing out on any price appreciation.
However, AutoZone (AZO) has a price of $2,348 per share (April 2023).
Traditionally, this would price you out of the market, and you would have to wait before investing, potentially missing out on any price appreciation.
These fractional shares would also be liquid, while they were much more difficult to trade or use in the past.
But even if you have $1 (and sometimes less) to invest, it can be put towards a large variety of shares. The ability to purchase fractional shares of stock makes it far easier for retail investors to manage their funds and access a previously restricted market, often through an intuitive mobile application.
The popularity of fractional shares is not limited to stocks. In fact, the application of fractional investment in exchange-traded funds (ETFs) really helps laypeople access the financial markets. ETFs track a diversified basket of securities at a low cost. But they can be traded with the ease of stocks. Each EFT will have a stock ticker available for trade on exchanges.
DEFINITION
Exchange traded funds are a type of investment fund that offer the best attributes of two popular assets: They have the diversification benefits of mutual funds while mimicking the ease with which stocks are traded.
An additional benefit of ETF investment is that you can still benefit from stock dividends, even if they do now own the underlying stock. If you want access to a specific industry, such as energy, the environment, the UK bond market, or US tech stocks, you can do so at a much lower price than purchasing each security individually.
Many ETFs now trade commission-free, and such funds have lower capital gains tax than actively managed mutual funds. As many ETFs are passively managed, expense ratios tend to be quite low. Fractional investment in ETFs is a great way to gain diversified access to multiple securities at a great price.
Many ETFs now trade commission-free, and such funds have lower capital gains tax than actively managed mutual funds. As many ETFs are passively managed, expense ratios tend to be quite low. Fractional investment in ETFs is a great way to gain diversified access to multiple securities at a great price.
All investment mechanisms have distinct advantages and disadvantages, and fractional shares are no exception.
The main benefits of fractional investing are:
✔️ Increased diversification for the same amount of capital across stocks and industries.
✔️ Allows market entry with a reduced amount of funds.
✔️ Faster than waiting to build up the total value of a full share.
✔️ Well suited to dollar cost averaging and other long-term investment strategies.
✔️ Allows market entry with a reduced amount of funds.
✔️ Faster than waiting to build up the total value of a full share.
✔️ Well suited to dollar cost averaging and other long-term investment strategies.
The cons of fractional investing include:
❌ A stock becoming affordable doesn’t make it a good buy. Just because you can get something cheap does not necessarily mean that you should!
❌ Fractional investing may lead to carelessness in the sense that few will care about losing $5 on a stock. But these small losses can add up.
❌ Just because a stock is priced high does not mean it is a good purchase. It’s better to invest in a low-priced stock that increases than a high-priced stock that falls. This point can be missed in all the hype.
❌ Fractional investing may lead to carelessness in the sense that few will care about losing $5 on a stock. But these small losses can add up.
❌ Just because a stock is priced high does not mean it is a good purchase. It’s better to invest in a low-priced stock that increases than a high-priced stock that falls. This point can be missed in all the hype.
The idea of fractional shares is that it’s simply a useful feature that allows access to the market, for specific stocks, at a lower price. As with all tools, the main thing is how you use them.
Nothing is ever guaranteed, especially in the world of trading.
Nothing is ever guaranteed, especially in the world of trading.
Another name for fractional shares is dollar investing. Because you can select a specific dollar (or Euro or Pound Sterling) amount regardless of the stock's price. This makes fractional shares a perfect vehicle for dollar cost averaging, where you buy a specific amount at specific intervals.
You might choose to invest $1,500 every three months in five different, diversified ETFs.
This equates to $300 per ETF every three months.
Each ETF can target a specific industry or be made to diversify across industries.
This equates to $300 per ETF every three months.
Each ETF can target a specific industry or be made to diversify across industries.
Fractional shares are a bad idea for those lacking emotional maturity or a long-term strategy. Ease of investment can be a pitfall in a world of hype and media marketing. It’s also relatively easy to trade $5 to $10 on a daily basis from a smartphone without doing the necessary research.
QUOTE
"The individual investor should act consistently as an investor and not as a speculator."
Young people especially are prone to read sensationalist news articles and allocate their funds to a specific stock, often on the same mobile device. Sometimes, high barriers to entry force an individual to think long and hard about a particular investment. The extra time it takes gives you a chance to either abandon the idea or proceed based on a stronger, more reasonable foundation.
Fractional investing allows you to benefit from dividends just like ordinary stocks. This is the case even with ETFs, where you do not own the underlying stock itself. However, it’s important to realize that not all stocks actually pay dividends.
You can research which stocks tend to pay dividends, and incorporate this into a dividend reinvestment plan and/or dollar cost averaging strategy. Dividends can be calculated by multiplying the dividends per share by the total shares you own.
You can research which stocks tend to pay dividends, and incorporate this into a dividend reinvestment plan and/or dollar cost averaging strategy. Dividends can be calculated by multiplying the dividends per share by the total shares you own.
FORMULA
Total Dividend Amount = Dividends Per Share x Total Shares
Defensive stocks are those that tend to pay dividends. These major corporations with a strong track record of paying out dividends are highly unlikely to go bankrupt due to economic conditions.
This includes McDonald's, Johnson and Johnson, Coca-Cola, and Microsoft, who have a track record of paying dividends on stocks. But many companies (such as Google and Amazon) can also choose not to pay dividends, reinvesting the profits into the organisation.
This includes McDonald's, Johnson and Johnson, Coca-Cola, and Microsoft, who have a track record of paying dividends on stocks. But many companies (such as Google and Amazon) can also choose not to pay dividends, reinvesting the profits into the organisation.
A company might pay a 5% annual dividend on a stock in a given year. If you fractionally invested $500 in this company priced at $1,000 per share, you would get $25 at the end of the year. It might not seem like much, but it all adds up with compounding interest year on year.
Fractional trading is most popular in the USA due to the high share price in this region. Trading 212 offers fractional shares listed in the US, UK and internationally.
Trading212 is an established fractional share brokerage in the UK. Users can invest as little as £1 in fractional shares and set up a recurring automatic schedule with Pies&AutoInvest. Over 7,000 stocks and ETFs are on offer with zero commissions.
UK customers can access fractional shares and ETFs for international stocks through UK brokerages. Before signing up, it’s important to consider what you are looking for so you don’t get hit with fees or charges down the line. There is a provider for everybody, but you need to know what you’re looking for first.
Trading212 is an established fractional share brokerage in the UK. Users can invest as little as £1 in fractional shares and set up a recurring automatic schedule with Pies&AutoInvest. Over 7,000 stocks and ETFs are on offer with zero commissions.
UK customers can access fractional shares and ETFs for international stocks through UK brokerages. Before signing up, it’s important to consider what you are looking for so you don’t get hit with fees or charges down the line. There is a provider for everybody, but you need to know what you’re looking for first.
Recap
Fractional shares are a great way to purchase smaller pieces of a company or ETF that has a large share price. This features lowers the barriers to entry and enables increased diversification of assets.
But democratising market access does not automatically mean an increase in profits, and fractional trading should be used in tandem with research, due diligence, diversification, and time-tested investment principles.
But democratising market access does not automatically mean an increase in profits, and fractional trading should be used in tandem with research, due diligence, diversification, and time-tested investment principles.
FAQ
Q: How do fractional shares work?
Fractional shares work by investing in a fraction or percentage of a whole share. You can hold or trade this fractional share just as you would with an ordinary share. If you have $500 to invest and the cost of a share or ETF is $2,000, you can still own a fraction of it.
Q: What are stock split fractional shares?
When stocks are priced too high, companies might consider a stock split. In fact, this has happened with a lot of major companies (such as Tesla) in the past couple of years, to make the price per share more affordable. A shareholder with a share that costs $500 might be given 4 extra stocks in a stock split, making each share worth $100. This shareholder now holds five shares instead of one at $100 each.
Q: Is fractional shares a good idea?
Absolutely. Fractional shares simply enable you to gain access to stocks that would otherwise price you out of the market. You are just buying a smaller piece of what you would already be interested in. It promotes increased market access for those who would otherwise not be able to afford it.
This also implies increased diversification. It makes it easier to invest in many smaller pieces of the pie, as opposed to purchasing a single, expensive stock or ETF. The same price for a whole share can be split over multiple shares in diverse industries.
This also implies increased diversification. It makes it easier to invest in many smaller pieces of the pie, as opposed to purchasing a single, expensive stock or ETF. The same price for a whole share can be split over multiple shares in diverse industries.
Q: Is there a downside to fractional shares?
There are no major drawbacks to fractional shares. But it is worth taking into account the fact that this does not really increase profit potential by itself. A larger investment in a single share that goes up in value is of more benefit than a smaller one in multiple stocks that do not go anywhere or that go down.
It’s important not to confuse technical features that increase market access with fundamentals that help increase market profitability over time. You will still need to hold assets for a long time and add funds at regular intervals to ensure long-term profitability.
It’s important not to confuse technical features that increase market access with fundamentals that help increase market profitability over time. You will still need to hold assets for a long time and add funds at regular intervals to ensure long-term profitability.
Q: Can you make money with fractional shares?
Yes, just as you would make money with any other type of share. The share may appreciate in value, and you can then profit from a sale. You may also receive dividends from the underlying share, and can then benefit from reinvesting these dividends.
But in line with market research and established patterns, remember that the longer the money is in the market, the more you will earn, all else remaining equal.
But in line with market research and established patterns, remember that the longer the money is in the market, the more you will earn, all else remaining equal.
Q: What are the best fractional shares apps?
The best fractional shares applications are typically those that cater to a younger audience, designed for easy, intuitive investment on the fly. Generally, applications from larger financial institutions tend to be designed with advanced traders and/or established investors in mind, with more features and customization options.
Among the list of high-quality fractional shares apps is Trading212, which has no withdrawal fees, no minimum deposit, and the ability to purchase fractional shares for as little as £1. But before signing up with a brokerage, you need to get clear about what you are looking for, including fees, minimum deposit size, features, ETF and stock range, available accounts, and more.
Among the list of high-quality fractional shares apps is Trading212, which has no withdrawal fees, no minimum deposit, and the ability to purchase fractional shares for as little as £1. But before signing up with a brokerage, you need to get clear about what you are looking for, including fees, minimum deposit size, features, ETF and stock range, available accounts, and more.
- Mutual Funds: A professionally managed investment fund that pools money from multiple investors to buy a mix of stocks, bonds, or other assets.
- Expense Ratio: The percentage of an investment fund’s value that goes towards management fees and other running costs each year.
- Dollar Cost Averaging: An investment strategy where an investor regularly invests a fixed amount, regardless of market conditions.
- Defensive Stocks: Stocks of companies that tend to remain stable during economic downturns, such as those in utilities, healthcare, and consumer staples. Many defensive stocks also pay dividends.
