Fractional Investing has popped up quite a bit recently, but what is it really? Will I still get dividends? And can I vote on my shares? Why are there fractions in the first place?
Hi friends, in this article, we’ll share with you all you need to know about fractional investing to help you get started. We’ll cover what fractional investing is, the benefits of buying them, what brokers are offering them and as a bonus, there’s also a strategy that can dramatically reduce your stock-specific risk in one go with fractional investing that we’ll share later in the article. If you’d like to know keep reading.
What is Fractional Investing?
There are many similar terms to fractional investing- micro-investing, stock slices, partial investing; they all mean the same thing. And it’s been increasingly used because many companies that are like dominant leaders of their own industry and growing, like Tesla, Google, and Amazon, their shares are super expensive. So those three companies, one share each, so just three shares will set you back five thousand dollars. So instead of buying a whole share of a company, with fractional investing you can buy less than one share, so in dollar amounts, you can invest a hundred dollars, five dollars, or one dollar.
Why Does Fractional Investing Exist?
So why do fractions of shares exist? It originally came because companies, listed companies, would do things like stock splits or mergers and acquisitions. It’s probably easier to explain via a stock split, so let’s say you hold 15 shares in some company, and this company announces they will do a three for two stock split. So every two shares you have will now become three. And in terms of mathematics, it’s just fifteen multiplied by three over two. So now instead of fifteen shares, after the stock split, you will now have 22.5 shares. So that half a share is now fractional share.
You don’t suddenly get richer with more shares, it’s just like slicing a cake into smaller slices.
So let’s talk about 5 benefits of fractional investing.
1. Invest Less Money With Fractional Investing
You no longer need a ton of money to get started investing. So imagine 10 different stocks from the more expensive, amazon at $3300 to let’s say NIO, which is around $60. If you want to buy one share of each of these ten stocks, you need more than seven thousand dollars, but with fractional investing, you could invest five dollars in each of these companies, so fifty dollars to get started in these ten companies, you get exposure on the upside and downside as well.
2. Fractional Dividends
The second thing is you still get dividends with fractional investing. So let’s say you invested ten dollars in a twenty-dollar stock, so instead of one share, you own half a share, and then this $20 stock pays out two dollars in dividends. Now because you only own half a share, you will receive half of that two dollars which is one dollar in dividends.
DRIPS work great with fractional investing: so dividend reinvestment plans. So let’s stick to the same example where you only invested ten dollars in a twenty-dollar stock and it paid out two dollars in dividends, where you receive a dollar. Now without fraction investing, you only received a dollar but that stock cost $20, so theoretically, you need to wait 20 years before you can actually reinvest to acquire new stock. However, with fractional investing, you can immediately use your dividend payment to acquire more of that shares and build a position that obviously entitles you to a bigger dividend payment if the company pays again because you own more shares.
4. Easy Diversification With Fractional Investing
The fourth great thing is now you can diversify with less money. With a hundred dollars, you can put ten dollars in ten companies. This allows for a more complex portfolio, which will increase the return on investment.
5. Great With Saving Plans
Now the last advantage is if you have a savings or investment plan, where you plan to save an amount of money, let’s say 100 or 200 each month, you can immediately put that money to action, you no longer have to wait before you can afford to buy a share but immediately use that and start investing.
What Brokers Offer Fractional Shares
While many brokers have just started to offer fractional shares, others only allow fractional investments as part of dividend reinvestment plans. What this means is you can only buy stocks that made the payout and no others. Make sure to get a broker that allows fractional investing wholly.
Some of the best brokers offering fractional shares are Robinhood, Charles Schwab, E-Trade, Vanguard, and TD Ameritrade.
What To Look For In A Broker
Let’s cover three things that you need to ask your broker before you actually pick and choose any one of them. The first thing is to ask them if they charge any commissions or fees for fractional investing because if they do, pick someone else.
The second thing is, ask what is the minimum buy-in. Some brokers say five dollars, some brokers say one dollar, some actually have no floor at all. There’s no actually recommended best practice here but it’s for you to be better informed.
The last thing is, ask your broker what is the range of shares and stocks that you’re allowed to do fractional investing. Some say it will be the top 50 stocks, which are largest obviously in the market, others say only an S&P 500, or some have a whatever range, so just be sure to ask before you actually choose and pick any particular broker.
We mentioned early on in the article about a way where you can dramatically reduce a stock-specific risk with fractional investing. That is, that you can also fractionally invest in ETFs. For those who don’t know, ETF stands for exchange-traded funds. They are funds that are traded like stocks on the markets. For those who aren’t really comfortable or don’t have time in choosing stocks, a fraction of investing in ETFs could indeed be the strategy for you. With fractional investing in ETFs, you immediately gain two benefits. One is convenience in investing because you no longer need to manage your own portfolio. The fund actually does it for you. The second thing is you immediately gain diversification without constructing your own portfolio. The fund holds a basket of stocks and so by definition could be considered a diversified investment within that sector.
With fractional investing in ETFs, you can supercharge your diversification.
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