Fractional shares are becoming more relevant as they enable the investor to buy fractions of stocks regardless of the share price. They remove the barrier to entry and put small cash investments to work.
What is a fractional share?
From the word itself, a fractional share is a fraction of or less than one full share of an Equity. These shares may be the result of stock splits, dividend reinvestment plans (DRIPs), or similar corporate actions.
Why fractional shares?
An investor is eager to set off to invest in the stock market, but they might be facing some hurdles to entry. One such hurdle can be the cost, the thousands of dollars that will be needed to get started. With buy-ins so high for some stocks, how can the average person invest? By buying fractional shares. Instead of purchasing one share of stock at the value the stock is currently trading at, it is possible to purchase a fraction of one share of a stock. And an investor can do so using whatever amount they have available.
Advantages of fractional shares
The advantage of buying a fractional share is that investors can buy part of a stock even if a full share is too expensive. One example is Google’s parent company Alphabet, whose shares are currently trading at over $1,257 each (as of 16.04). Fractional shares remove the barrier to entry for those who want to invest, including underserved individuals who would like to experience the actual trading. The investor controls how much money they want to spend on a stock. Fractional shares allow an investor to build their portfolio even without requiring a significant chunk of change to invest. This could potentially allow their money to participate in the stock market for a longer period. It also helps investors buy the stocks they want to hold in their portfolios, not just the ones they can afford.
Fractional shares can give the investor more control over their portfolio. They allow them to figure out a strategy using the desired amounts of each stock. Through this, investors can easily buy a variety of stocks that they can develop to a more diversified portfolio. By buying a variety of investments, diversification can mitigate some risk in their portfolios. With more control over how much of each stock they can buy, investors could potentially construct a portfolio that is diversified to their liking.
Investing using the fractional share method can give new investors access to stock markets, and it's the appropriate approach to learning to invest. This hands-on approach may be a more effective form of education than investment ideas or theory concepts.
Fractional shares of ETFs will allow investors to invest in ETFs or Baskets of ETFs. In the past, investors needed at least the company’s share price to buy in, leaving many unable to invest in pricey companies.
Most account minimums are of $1,000, some as high as $10,000, or even more. With these high account minimums, many people have found other creative ways to invest in companies. And that’s where fractional shares come in handy.
A large capitalized ETF now allows purchases of as little as .001 of one share, meaning if a stock’s price is $10, the minimum investment needed is one cent. Investors are able to invest their funds and track top 500 US companies with a tiny amount like that. Either for initial investment or for rebalancing purposes, the impact is exponential to the underserved segments.
Applying fractional shares to brokerage and investment management applications allows the scalability of the offering to all client categorization. Wealth and investment solutions offerings have dynamically changed from being exclusive to UHNWs, to being available also to retail investors. The next wave of offerings in the wealth industry is focused on how to democratize social and responsible investment solutions to the underserved segments.