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The purchase of fractional shares is becoming more and more commonplace as an increasing number of new traders look to get involved in stock trading. So, what exactly are fractional shares, why may they beneficial to you, and how can you buy and get involved in fractional share trading?
That is exactly what we will look at here in helping you understand exactly what to expect from trading in this type of asset.
Basics of Fractional Shares
As the name suggests, a fractional share is an amount less than one whole share in a company you would like to invest in. This means you can purchase a percentage amount of one share based on the amount of money you have available.
This type of opportunity and trading in fractional shares is increasing in popularity as more people get involved in trading stocks particularly for the first time. The chance for you to buy a piece of a certain company that may be less than a whole share can bring about a number of benefits depending on your trading goals.
Where traditionally, fractional shares were rare and only created in situations like mergers and acquisitions, they are becoming an increasingly popular type of asset being offered by several top online stock brokers often with commission-free trading and other benefits.
Benefits of Fractional Share Trading
This type of trading brings with it several benefits that make it an ideal choice for many. These are some of the reasons why many traders have become more interested in online trading of fractional shares, and why this type of trading may continue to grow in terms of attractiveness.
Making Stock Trading More Affordable
Some of the most popular company stocks for investors, particularly when it comes to big tech names like Amazon, Google, and more can have very high prices for a single share. These prices that can often be more than $3,000 for a single share can make building a portfolio of stock very expensive.
Having the ability to purchase fractional shares can work to greatly reduce this cost from the outset. For example, buying a whole single share in Amazon at the time of writing would cost you $3256. Fractional shares mean you could still own a fraction of this share, say 1/10th, for a much more affordable $325.
Essentially, fractional shares open the door to you owning all of your favorite company stocks but still staying within your budget range.
Helping to Diversify Portfolios
Fractional shares not only allow you to get in on the action of your favorite shares no matter the price, but they also mean you can build a diversified portfolio within your means.
Where you may traditionally have had to allocate a large chunk of your overall budget to a certain stock if it had a higher price, with fractional shares you can maintain your portfolio balance by scaling your investment appropriately according to the Dollar value of particular stocks.
No longer do you have to build your portfolio around a couple of hugely expensive single stocks, you can instead allocate a set amount for each company you would like to invest in and let fractional trading take care of the actual stock amounts you can purchase for this budget.
Maximizing Utilization of Capital
With brokers who do not offer fractional shares trading it may be quite common for you to find smaller “leftover” funds that can’t be allocated to a certain stock since it may not be enough to purchase a full single share.
This no longer needs to be a problem with fractional shares. Instead of these leftover funds not being invested, they can instead be allocated to your chosen stock for purchase of a higher fraction, or to another stock of your choice.
Who Trades Fractional Shares?
Anyone can trade in fractional shares so long as they are offered for trading by your broker. The benefits mentioned above can also apply equally to any trader at all levels regardless of your budget, though there are a couple of types of traders for whom fractional shares are ideal.
If you are new to trading, this kind of trading is the perfect way for you to get involved in trading stocks of your favorite companies while simultaneously managing your risk. Starting with smaller amounts of capital is advisable when you are a new trader and gives you the perfect opportunity to learn more about trading and the stock market while still having a piece of your favorite stocks.
Working within a smaller budget as a casual trader means fractional shares may also be a perfect fit for you. Again the model still allows you to own your favorite company stocks with all the benefits that brings, and even to have a well-diversified portfolio. All while remaining within your financial boundaries.
Where to Buy Fractional Shares
As mentioned, fractional shares are quickly becoming the go-to trend in the market today. This means you can find them offered by a number of brokers. While it is important to always do your due diligence before making a broker choice when it comes to fees and trading conditions, there are a couple that stand out from the crowd.
Public.com is a relatively new but very well-regulated and trusted player in the sector. They offer hundreds of top shares and ETFs for you to trade completely commission-free through their proprietary mobile app that also incorporates many great social trading features.
M1 Finance is another great service you can use to get started in fractional trading and much more including a digital banking service and the ability to borrow against your portfolio of fractional shares at very competitive rates.
Both brokers like many in the sector when it comes to fractional shares offer commission-free and largely fee-free trading. This reinforces the key benefits of this type of trading that it is both accessible, flexible, and very affordable.
For more information on these brokers, fractional shares trading, and how to make your trades, feel free to check out our guide on how to buy fractional shares.
Anthony is a financial journalist and business advisor with several years’ experience writing for some of the most well-known sites in the Forex world. A keen trader turned industry writer, he is currently based in Shanghai with a finger on the pulse of Asia’s biggest markets.