Fractional Shares: Invest for Less
Today, we’re going to spend a little time discussing fractional investing—one in a long line of advances that have helped to democratize investing. We’ll cover what it is, the problems it solved, and how you can enjoy this low-cost investing tool today.
The Tea
If you invest in the year 2023, kick back, relax, and count your blessings. Because Americans who want to invest have never had it better.
The past few decades have ushered in several new technologies, products, even ways for brokerage firms to earn money that have made investing faster, easier, and cheaper for the average American.
- Online trading? Wasn’t always so. Once upon a time, you had to pick up a phone or drive over to your broker to buy or sell a stock.
- Index funds? Created in 1975. Over time, index funds helped drag fees to the ground. Same with exchange-traded funds (ETFs), which were created in the 1990s. Before that, you had little option but to pay several types of fees to the mutual fund companies.
- Commission-free trading? Ha! During the 1960s and 1970s, investors paid almost 1% in commissions on every “round-lot” (100 shares) trade. You had it far worse if you were buying just a few shares. Even as recently as 2010, investors would have to pay between $10-$20 to make a single trade, no matter the size! But thanks to heavy competition in the brokerage space (and new ways of monetizing account holders), commissions have been flattened—and nowadays, many brokers offer commission-free stock and ETF trading.
But one of the most relatively recent advances has perhaps done the most for making investing accessible not just to your average adult, but even kids and teens.
The Take
Enter the fractional share—something that millions of investors now have access to.
A problem for low-dollar investors
It’s early summer 1986. Coca-Cola (KO) has just celebrated its 100th anniversary. The stock has been on an absolute tear for the past five years, tripling in value (+210%) and beating the pants off the S&P 500 (+86%). You—a young chap with about $50 in your pocket—are confident that Coca-Cola has put its New Coke flop behind it and want to buy a share of the stock.
YATI Tip: Younger investors can use fractional shares to buy these kid-friendly stocks.
There’s just one problem: You can’t afford it. Coca-Cola is trading around $115-$125 per share.
What do you do?
In 1986, you wait for the only good event that can bring down the price of a stock: a stock split.
A stock split is just a mathematical sleight of hand. Let’s say a $100 million company has 1 million shares that trade for $100 apiece. They announce a 2-for-1 stock split, which means for every share you own, you will receive two shares at half the price. So now, there are 2 million shares trading for $50 apiece. If you owned one share worth $100, you now own two worth $50 each, or $100 overall. (In short: Stock splits don’t do anything for existing investors, but they do make stocks more affordable for new money.)
In Coca-Cola’s case, it announced a 3-for-1 stock split that took effect at the end of June. KO shares closed June 30 at $125.50 per share. They split as of the next session—on July 1, you could put your $50 to use buying a share for between $42 and $44 during the trading day.
Thing is, a company might only split its stock every few years, if that often, if at all.
Problem solved … with fractional shares
While stock splits are still a thing—Google parent Alphabet (GOOGL), Amazon (AMZN) and Tesla (TSLA) all split their stock last year!—you no longer have to wait for one to put a company’s shares within financial reach.
In fact, if you have $50 in your pocket in the year 2023, not only can you buy stock in one company—depending on who your brokerage is, you can buy stock in dozens.
Thank fractional shares for that.
Fractional shares are exactly what they sound like—portions of a stock, rather than the whole thing. If a stock you want to buy costs $100, and you don’t have $100, that’s OK. With fractional shares, you might be able to buy a portion of one share for, say, $5, maybe even as little as $1.
It’s that simple.
Like with virtually anything in the investment world, there are tradeoffs. The biggest one has to do with liquidity. From the Securities and Exchange Commission (SEC):
“Liquidity refers to the ability to quickly and easily sell a stock or other security. If a stock in which you purchase fractional shares becomes illiquid, the underlying fractional shares will be illiquid as well.
“Some brokerage firms have indicated that they do not guarantee the liquidity of fractional shares, even if fully shares of the stock are liquid. This means you may have difficulty selling fractional shares in certain circumstances and could potentially lose money on the investment. Ask your brokerage firm and read your brokerage firm’s account agreement to see if you need to consider liquidity when selling fractional shares.”
It’s a legitimate concern, but one that typically won’t bite your average investor in the butt. Typically, you’ll only be concerned about liquidity if you’re trying to buy or sell amid a massive move in a stock—lack of liquidity could result in your order getting filled at a much different price than you’d hoped.
TL;DR: If you don’t have much money, and you plan on buying and holding, fractional shares are your friend.
Where you can buy fractional shares
Fractional shares didn’t suddenly appear out of thin air—they’ve existed for decades.
YATI Tip: You don’t even need fractional shares to afford these top stocks for beginners with little money.
They’re pretty common in dividend reinvestment plans (DRIPs), for instance. Normally, when you buy a dividend stock, its dividend is either paid to you by check or directly deposited into your account. With DRIPs, however, dividends are automatically reinvested back into the stock of that company—and because those dividend payments are often less than the price of a share, they’re used to buy fractional shares instead.
However, fractional investing as we know it—where you simply take new money and use it to buy partial shares of whatever stock you want—was actually created around the turn of the millennium by a now-defunct company called BuyandHold, and didn’t really hit the mainstream until the late 2010s.
Now, though, you can get fractional shares through a number of investment platforms. Here are just a few prominent examples:
- Plynk: An excellent investment app for beginners that offers commission-free stock, ETF, and mutual fund trading. You can find investments based on your interests, enjoy straightforward, easy-to-understand educational content, and even redeem unused gift cards for money that you can use to buy stocks. Fractional investing starts at $1.
- Acorns: This micro-investing app allows you to invest spare change through its Round-Ups feature. This isn’t a self-directed account—instead, it offers managed ETF portfolios—but you can still invest with small increments of cash. Acorns also comes with a Visa debit card and other online banking features. Fractional investing starts at $5.
- SoFi Invest: SoFi Invest not only allows you to buy stocks, ETFs, and options commission-free, but it also doesn’t charge contract fees for options. The app has a simple design and plenty of educational resources. Fractional investing starts at $5.
You can check out our fuller list of fractional share brokerages if you’re interested in signing up for an account. But, in short, you have plenty of ways to begin putting even a few dollars to work.
Riley & Kyle
Young & The Invested (Soon to be WealthUp)
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.