Fractional Shares
Fractional stock trading has transformed the investment market, making equities more accessible to new traders. Often investing in big names come with big stock prices, but fractional shares have changed this, giving swing traders the opportunity to purchase a portion of a stock from just $1. This guide to fractional stock trading explains how it works, the pros and cons, plus the best brokers in 2024.
Brokers With Fractional Shares for United States
What is Fractional Stock Trading?
A fractional share is a portion of a stock that is less than one full share, for example, 50% or 75%. Today, brokers intentionally split whole shares so that retail investors can speculate on expensive equities with less capital outlay. It is important to note that fractional stocks do not usually trade on the open market. Instead, you buy and sell shares through an online brokerage, such as Robinhood, Fidelity or Interactive Brokers.
Example
Let’s say you are interested in a stock with a share price of $1,000, but you only have $200 available. With fractional stock trading, you can purchase one-fifth of the share ($1,000 / 5 = $200), giving you exposure to price swings. Note, minimum portion sizes may also apply.
How Fractional Stock Trading Works
Traders purchase fractional shares through a process known as dollar-based investing. This involves purchasing a proportion of shares that your spending power allows. Importantly, when acquiring a fraction of a share, you are still an investor in a company and will receive returns relative to your investment.
As stock exchanges themselves do not facilitate fractional stock trading, brokers hold the remaining portions. If you purchase 50% of a share in Google, for example, the other 50% will be held by your swing trading broker in an internal account. Alternatively, this may be used to fulfil another trader’s investment.
It is also worth noting that if you are planning to transfer your assets to a new brokerage, you normally lose all of your fractional shares and your positions will automatically be cashed out. Only full shares can typically be transferred to an alternative account.
History
The concept of fractional stocks is relatively new. Its history dates back to 1999 with the launch of BUYandHOLD. The company offered a subscription-based service allowing customers to purchase shares in small dollar amounts. The idea was that members could build up a portfolio over time.
In 2019, Interactive Brokers became one of the first retail brokerage sites to offer fractional stock trading on US-listed equities. Today, however, there are many supporting brokers, robo-advisors and fractional stock trading apps.
Online Brokers
The fractional shares concept is also now being applied to the crypto trading environment. Binance and Coinbase give investors the opportunity to purchase a fraction of a Bitcoin, for example, that would otherwise have cost thousands of dollars. The same can apply to non-fungible tokens (NFTs).
Many of the best fractional cash apps and trading platforms have also slashed their commission fees to zero, offering attractive opportunities to traders in the US, UK, Europe and beyond. Below we outline some of the most recognized fractional stock trading brokers and financial services providers:
Robinhood
The platform allows customers to trade stocks and ETFs with as little as $1. Trades can be as small as one-millionth of a share and any company stock with a market cap of $25+ million is accessible. Swing traders also benefit from commission-free executions and real-time trading conditions. In addition, customers can reinvest associated dividends.
Vanguard
Vanguard offers fractional shares trading via mutual funds. The firm is also piloting a fractional stock programme for ETFs, including VTI. Unfortunately, minimum investment amounts are significantly higher than competitors, with initial funding requirements starting at £500 for a single position or monthly instalments at £100 per month.
Schwab
Schwab added fractional stock trading its asset line-up in early 2020. Today, the ‘Stock Slices’ programme allows investors to purchase a fractional share of any stock in the S&P 500 index. There are also no trading commissions or transaction fees.
Customers can invest from just $5. Alternatively, swing traders can reinvest associated dividends back into fractional shares of the same equity.
Fidelity
One of the most recognized fractional stock trading platforms, Fidelity offers access to almost 8,000 US stocks and ETFs. These include shares of globally established brands like Google, Netflix, Apple and Tesla.
Similar to Schwab, there are no trading commissions. Simply trade via the ‘Stocks by the Slice’ portfolio with as little as $1 and no dollar maximum per order. There are also no minimum deposit requirements to open a retail account. In addition, the platform offers a mobile terminal, ideal for placing market or limit orders for a shorter time period.
Are Fractional Stocks Profitable?
Fractional shares enable swing trading clients to buy portions of many company shares, meaning you can easily diversify your portfolio. But are fractional stocks worth it from a profit perspective?
One of the major benefits is that you can purchase stocks that you couldn’t normally afford. But the trick to gaining a significant payout is to be consistent. Investing through regular payments can create a long-term cost-averaging plan that is more likely to produce profits.
Fractional shares are also a great way to get started on your trading journey. Retail traders can benefit from proportionate dividends and reinvest earnings.
Approaches
Fractional stocks can occur for many reasons, including DRIPs, stock splits, plus mergers and acquisitions:
DRIP
A popular way to buy fractional shares is through a dividend reinvestment plan (DRIP). With this strategy, you can use private company dividends to purchase more shares in an organization. Over time, dividend reinvestment can help multiply profits by purchasing additional stocks and reducing risk through dollar-cost averaging.
This strategy can be set up through a broker, or directly via the company, often without additional ongoing costs. It is seen as a hands-off approach to trading with little intervention required due to the auto-funding mechanism. Some companies also offer flexibility with full or partial re-investment options.
Stock Split
Fractional shares can be the result of a stock split. This happens when an organization increases the number of its shares to create liquidity. The definition of a stock split is simply a commercial action in which a corporation issues extra shares to shareholders, increasing the total by the specified ratio based on the shares they held previously. Common ratios include two for one or three for one.
This essentially means traders will have two or three shares per one share held previously. It is important to remember the total value of your held shares does not become more valuable. It is simply an action by companies to lower a trading price to a more attractive price for new investors.
Mergers & Acquisitions
Mergers or acquisitions can also create fractional stocks since the two or more organizations involved will combine stocks using a programmed ratio. This could mean four shares of Company 1 could become two equivalent shares of Company 2. Similar to stock splits, investors will not benefit financially from a different number of shares as the value generally remains the same.
Benefits of Fractional Shares
- Portfolio Diversification – With fractional shares, you have the option to invest in more companies. You can split your money between various industries and reduce your risk exposure to price volatility. Without fractional shares, traders are limited to investing incremental amounts equal to the share price of a stock or ETF.
- Accessibility – Fractional shares allow retail traders to invest in companies with a high share price. You can start with a smaller initial stake rather than having to wait until funding is accessible for a whole share. This is particularly exciting for big companies like Tesla, Google, Amazon and Gamestop (GME), which may previously have been inaccessible
- New Investors – In the last few years, fractional shares investing paired with the subsequent rise in commission-free trading has paved the way for a record number of young, first-time investors to enter the market. The concept has simply made investing more affordable. Utilize brokers tools such as stock calculators to determine how many shares you will receive with your capital
Risks of Fractional Shares Trading
- Transfer Restrictions – It is unlikely that you will be able to transfer any fractional shares you own to a new brokerage account. Whole shares are easily transferred, but any fractional shares may have to be sold. This may also result in fees and tax implications
- Fees – With a fractional shares investment strategy, traders often make regular payments to buy full shares or increase a proportion of ownership. Although this can increase revenue opportunities, commissions may apply on a transactional basis which can eat away at profits
- Broker Limitations – The fractional shares concept is still relatively new and not all brokers or platforms offer them. There may also be operational variations between brokerage accounts, such as dividend payouts and voting rights. Look for alternative ways to access fractional stocks including via ISA accounts or dividend reinvestment plans (DRIP)
Getting Started
- Open A Brokerage Account – If you want to invest in fractional stocks, the first thing to do is open an account with a broker that offers this style of trading. Some of the most recognised brokers that offer fractional shares include Fidelity, M1 Finance, Freetrade (UK app), SoFi, Hatch, Trading 212 and WealthSimple
- Purchase Shares – Once you have opened an account, you can start investing. But remember, you will need to specify the amount of money you wish to invest. Your swing trading broker will then purchase as many shares as possible with the money provided
- Monitor Your Trade – Keep an eye on your investment. Consistent payments can also help you progress towards getting a larger ownership proportion of a share, increasing your profit potential. In addition, fractional stocks that pay dividends may provide further revenue opportunities meaning you can reinvest
Bottom Line on Fractional Stocks
Fractional shares are a great way to start your investment journey. Become a shareholder in some of the world’s leading brands and diversify your portfolio with limited capital outlay. But before purchasing fractional shares, make sure you understand your broker’s trading policies and restrictions.
FAQ
Are Factional Shares Safe And Legal?
Yes, it is legal to trade fractional shares. They are not traded on the open market so they must be purchased via a registered brokerage such as Fidelity or eToro. They are a safe asset to trade but investments will need monitoring just like any other. We also recommend signing up with a regulated firm.
What Fractional Stocks Should I Buy?
The best fractional stocks to buy will depend on your strategy and risk appetite. There is no right or wrong stock to purchase as it depends on your financial plan and the price of the stock or fund you are looking at. If you are interested in a particular company but its share price is more than your current bankroll, it may be worth buying a fractional share.
Can You Buy Fractional Stocks On TD Ameritrade, Webull, Plus500, Vanguard, XTB and Fidelity?
Webull and Fidelity do offer fractional stock trading. However, they are not currently available at TD Ameritrade, Degiro, Hargreaves Lansdown, eTrade, Questrade, XTB, IG, Plus500 or Vanguard. These brokers and platforms do, however, offer alternative trading options such as CFDs, ETFs and mutual funds.
Are Fractional Shares A Good Or Bad Investment?
Fractional shares allow swing traders to buy less than a full share, ideal for new and inexperienced investors. Funds can be added to a little at a time rather than a one-off large deposit. It also creates flexibility and portfolio diversification opportunities.
Fractional Shares Vs Penny Stocks – What Is The Difference?
A penny stock refers to a small company’s shares that typically trade for less than $5 per stake. These are generally traded directly between buyers and sellers via the OTC market. Fractional shares are portions of a full stock and allow you to speculate on the price of established companies.
How Can I Get Started With Fractional Stocks?
Do your fractional shares research! YouTube has plenty of video content to help you get a better understanding including definitions, how to buy fractional stocks, the pros and cons, plus the difference vs whole shares. Once this makes sense, find a swing trading broker or cash app that offers fractional shares.