February 8, 2021

Fractional Shares: Pros and Cons

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Fractional shares let you buy stocks starting from as little as just $1. Find out if they worth it and the downsides to fractional shares.

In the past, if you wanted to invest in a company, you needed to purchase one full share. This was hard for new investors because popular companies cost hundreds of dollars per share.

Luckily today, fractional shares have made it possible to buy tiny pieces of a stock with just a few bucks.

Read on to learn how it works and where you can buy fractional shares.

What Are Fractional Shares and How Do They Work?

A fractional share is simply a portion of a full share of a company stock.

Take this example: You walk into your local pizza joint and are told that the price of a whole pizza is $100. Pretty pricey. And you only want one slice. So you ask if you can just buy a tenth of the pie for $10. That slice is a fractional share of the whole pizza.

Now let's apply that to stocks. A piece of Amazon stock is now more than $3,000 per share. That's pretty insane. With fractional shares, you can just buy $5 or $50 (or whatever amount you want) and own a tiny piece.

How to Buy Fractional Shares

First, you need to use an investing platform that supports fractional shares purchases (we'll discuss that below).

The easiest way is to buy fractional shares in dollar amounts. Look for the company you want to invest in. Then select "buy" and type in the exact dollar amount you want to purchase. It's that easy.

The Pros of Fractional Shares

  • Start small with less risk. When you're just beginning your stock market investment journey, buying fractional shares allows you to invest just a small amount of money. You don't need to risk much.

  • Diversify. Diversification is the most important part of any investment strategy. Fractional shares allow you to spread out your investment over many different companies. For example, if you have $50, you can invest in 10 different companies at $5 each.

  • No more uninvested cash. In the past, if you have extra money after buying shares (but not enough for another share), it'll just be sitting in your brokerage account. But with fractional shares, you can invest that money. So you won't have any extra cash just sitting around not doing anything.

  • Dollar-cost investing. In dollar-cost averaging, you contribute the same amount over a long period of time. This strategy also reduces risk. Fractional shares mean you can consistently invest small amounts every month (or week).

Do Fractional Shares Pay Dividends?

If you own a stock that pays dividends, then your tiny fractional share will also pay dividends. Your dividend payout will depend on how much of a share you own.

For example, a stock pays $2 in dividends per share (for simplicity's sake). If you own 1/4 of a share, then you'll also get 1/4 of the typical dividend payout (which in this case, will be $0.50).

Most investing platforms let you automatically reinvest your dividends. So you'll own more and more of the company without even doing anything.

Are There Downsides?

There's really not a lot of downsides to being able to purchase stocks with less money.

However, one downside is that not all brokerages support fractional share purchases. Most traditional brokerages (like ETrade and TD Ameritrade) don't yet allow fractional shares. Usually, it's micro-investing apps that have this feature, but these apps are more basic.

Also, if you outgrow one of those apps and want to transfer to a more robust brokerage, your fractional shares may not be able to be converted.

Where to Buy Fractional Shares

This is the good news for investors in today's technology age! There are lots of micro-investing apps that support fractional shares.

Some of our top recommended platforms for fractional shares are:

  • Robinhood
    Robinhood (read review) is a user-friendly DIY brokerage for new investors. You can invest in any stock and ETF starting from just $1. You can even buy fractional shares of some cryptocurrencies, including bitcoin.

  • Stash Invest
    Stash (read review) is great for those who want to learn about investing. It will help you build a diversified portfolio according to your goals, but you have full control over what you want to invest in. You need $5 to start investing, and fractional shares are available starting from just 1 cent.

    Stash

    Sign Up and Get $5

    • Sign up, add at least $5 to your account and get a $5 bonus.
    • Invest with fractional shares
    • Get portfolio recommendations

  • Acorns
    Acorns (read review) is the original "spare change" robo-investor. It will automatically invest your spare change and manage your portfolio for you. It's a great option for those who don't want to choose their own investments at all.

  • M1 Finance
    M1 Finance (read review) offers the best of both worlds. You choose your own investments and M1 will make the trades and manage it. After creating a portfolio, M1 will automatically calculate the fractional share purchases for you. The minimum to start is $100.

    M1 Finance

    New Customers: Deposit $1,000 and Get $30

    • Open a new M1 account.
    • Deposit $1,000 or more in your Invest account during your first 14 days.
    • Get a $30 bonus.
    Expires 12/31/2021

  • Public
    Public combines investing with a social community. It organizes stocks into themes, so you can just choose the categories you're interested in (like Women in Charge, Growing Diversity, Green Power, and tons more). You can invest in stocks starting with $5.

  • Fidelity
    Fidelity is a traditional full-service brokerage, so it's great if you're looking for something more robust. It's one of the only traditional brokerages that supports fractional shares. You can invest in stocks and ETFs starting from $1.

  • Charles Schwab
    Schwab is another traditional brokerage. But fractional shares aren't available for all stocks. You can only buy fractional shares of S&P 500 companies through Schwab Stock Slices, starting from $5.

Best of all, just about all brokerages have now eliminated trading fees. So you can get in on the action at a very low dollar amount.

Bottom Line

Fractional shares are a great option for both beginner and savvy investors. You can own portions of companies that may be out of reach. It's also a great way to diversify your portfolio at a low cost.

Anna G is a contributing writer at CreditDonkey, a personal finance comparison and reviews website. Write to Anna G at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

CreditDonkey is a paid Affiliate/partner of Stash. Investment advisory services offered by Stash Investments LLC, an SEC-registered investment adviser. This material has been distributed for informational and educational purposes only, and is not intended as investment, legal, accounting, or tax advice. Investing involves risk.

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