Is Buying Fractional Shares Worth It?

Fractional shares allow investors to purchase a portion of a company’s stock rather than requiring the capital to buy full shares. This approach democratizes access to the stock market, making investing in high-priced securities more accessible. They are popular among new investors or those with limited funds.

What Are Fractional Shares?

A fractional share is a segment of a full stock share. Brokerage firms offer these partial shares, enabling dollar-based investing. An investor can choose to invest a specific dollar amount, such as $50 or $100, into a stock, rather than buying a set number of full shares. The brokerage then calculates the corresponding fraction of a share based on the stock’s current price.

Brokerages aggregate orders from multiple investors to purchase full shares. After acquiring whole shares, the brokerage allocates fractional ownership to each investor based on their dollar contributions. For instance, if a stock trades at $1,000 per share and an investor invests $200, they receive 0.2 shares. This process allows investors to gain exposure to companies even when they cannot afford a full share.

Assessing the Investment Value

Fractional shares offer several benefits. They lower the barrier to entry for expensive stocks, allowing individuals to own a piece of high-value companies that might otherwise be out of reach. This accessibility means investors can begin building a diversified portfolio with a small amount of capital. Diversification is a strategy to spread investments across various assets to manage risk.

Fractional shares facilitate dollar-cost averaging, a strategy where an investor regularly invests a fixed amount of money into an investment over time, regardless of the share price. This approach helps reduce the impact of market volatility by averaging out the purchase price. By enabling investments based on dollar amounts, fractional shares ensure all available funds can be put to work, minimizing idle cash.

Despite these advantages, several considerations exist. Not all brokerage firms offer fractional share investing, and the availability of specific stocks or exchange-traded funds (ETFs) for fractional purchases can vary. Another consideration is the transferability of fractional shares between brokers. Many fractional shares cannot be directly transferred to another brokerage account; instead, they may need to be liquidated, which means selling them and transferring the cash proceeds. This liquidation can trigger a taxable event for any gains realized.

Regarding shareholder rights, fractional share ownership has limitations. While some brokerages may allow fractional shareholders to exercise proxy voting rights proportionally, others do not offer this feature. Investors should understand their brokerage’s policy on voting rights. Corporate actions, such as stock splits, mergers, or spin-offs, and dividend distributions are generally handled proportionally for fractional shares. If a company declares a dividend, a fractional shareholder receives a proportional payout based on their ownership percentage.

Tax implications also warrant attention. While brokerages track cost basis and report sales on IRS Form 1099-B, fractional share transactions can introduce complexities. Investors are responsible for maintaining accurate records of their cost basis, especially when selling a portion of their fractional holdings. The “first-in, first-out” (FIFO) method is often the default for determining which shares are sold for tax purposes, but investors might be able to elect specific identification for their shares. Understanding these tax rules is crucial for accurate tax reporting and managing capital gains or losses.

How to Invest in Fractional Shares

To begin investing in fractional shares, the initial step involves identifying a brokerage platform that supports this type of trading. Many online brokerages now offer fractional share investing, allowing clients to buy portions of stocks and ETFs. Researching different platforms to compare their offerings, minimum investment amounts, and available securities for fractional trading is a practical starting point.

After selecting a suitable brokerage, the next step is to open and fund a brokerage account. This process typically involves providing personal information, verifying identity, and linking a bank account for transferring funds. Most brokerages allow investors to fund their accounts through electronic transfers, wire transfers, or checks. Once the account is funded, the investor is ready to place an order.

Placing an order for fractional shares usually differs from traditional whole-share purchases. Instead of specifying the number of shares, investors typically enter the dollar amount they wish to invest in a particular stock or ETF. The brokerage’s system then calculates the corresponding fractional share quantity based on the current market price. For example, if an investor wants to buy $25 worth of a stock, they enter $25, and the system will execute an order for the fractional equivalent. After the purchase, investors can monitor their fractional share holdings and performance directly within their brokerage account interface, just as they would with full shares.