What is fractional share investing?

Fractional shares are an investment where you are able to buy less than a full share of stock. For example, as of this writing, one Class A share of B...
What is fractional share investing?
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This story originally appeared on Due

Fractional shares are an investment where you are able to buy less than a full share of stock. For example, as of this writing, one Class A share of Berkshire Hathaway stock goes for $311,126.00. Most people couldn’t afford to pay over $300,000 for a single share of stock. But with fractional investing, you can buy a sliver of a share, often starting at just $5.

If you are starting out and want to buy stock but don’t have enough money, or the desire, to invest in full shares, read more to learn how fractional shares work and some of the top brokerages today that offer access to fractional share investing.

What are fractional shares

A share of stock represents a small stake of ownership in a company. If a company has 100 million shares outstanding and you buy 100 shares, you own 0.000001% of the company. But if you can’t afford 100 shares, and can’t even afford 1 share, you can still likely afford fractional shares.

Just as a share of stock represents a small portion of ownership of a company, a fractional share represents a portion of ownership of a share of stock. If a share trades for $100 per share and you invest $10, you own 10% of a share of that company.

A share of Google stock is worth about $1,500, for example. If you want to invest $5, $10, $100, or any other amount in Google, or any other stock supported by your brokerage for fractional share trading, you can do so just that.

It even works with more than a single share of stock. If a stock trades at $20 per share and you want to invest $50, you can buy 2.5 shares. With fractional shares, all stocks can be as accessible as any $5 stocks.

How to invest in fractional shares

Investing in fractional shares is as easy as investing in full shares. You just need a brokerage account that supports fractional shares and enough cash in your account to buy the minimum. Here are the key steps in buying fractional shares:

How to buy fractional shares

  • Open an investment account with a brokerage that supports fractional shares. Many popular brokerages today support fractional shares. While fractional shares used to be primarily something from specialty brokers, it is now a common feature.
  • Fund your brokerage account. Link your brokerage account to a bank account and transfer funds into your account. It may take a few days for funds to clear, though some brokers give you instant credit for incoming deposits.
  • Choose a stock to buy. Review the long list of stocks available to buy based on your investment criteria. Popular methods to decide if a stock is worth buying include technical and fundamental analysis.
  • Enter a buy order. Using your broker’s website, desktop app, or mobile app, enter a buy order for the stock you want to own by entering a dollar amount or share amount that’s less than a full share.

How fractional share investing works

Behind the scenes, exchanges like the New York Stock Exchange and NASDAQ don’t accept trades for a fractional share of stock. Instead, your brokerage owns full shares and divides them up among customers.

For you, that means you can create a diverse portfolio with many stocks for less than $100. You could also setup a recurring investment of $5 per month or $10 per month in a small group of stocks to build up ownership over time.

How you use fractional shares is up to you. With no commissions for stock or ETF trades at most brokerages today, you can buy small slivers of stock and not worry about fees taking up a large portion of your investment gains.

Best brokers to buy fractional stocks

There are many brokerages that support fractional shares today. Here are some top options to consider:

  • Fidelity
  • Charles Schwab
  • SoFi Invest
  • Robinhood
  • Interactive Brokers
  • Stockpile
  • Public
  • M1 Finance

Pros and cons to fractional shares

Pros

  • Start investing with very little money: Open an account and buy stock for less than $10 if you want. Check for account and fractional share minimums when looking at fractional share investing accounts.
  • Buy into companies with a high share price: Buy a stake in companies with high stock prices that you couldn’t otherwise afford or would be too big of a portion of your portfolio.
  • Create a diverse portfolio in a small account: If you divide up $100 into $5 stock purchases, you can build a portfolio of 20 stocks. With fractional shares, you can build a diverse portfolio on a tighter budget.

Cons

  • You don’t own the full share: The biggest downside is that you own less than a full share. But that’s already implied with the name “fractional share.”

The bottom line

Fractional shares can be a great way to invest, particularly for new investors and investors with a smaller account balance. But fractional shares can be the foundation of a long-term investment plan that leads to a growing investment account balance that can help you reach virtually any viable investment goal.

If you want to start investing small or buy a slice of a company with little risk, fractional shares are the perfect investment vehicle for you.

The post What is fractional share investing? appeared first on Due.

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