“Buying fractional shares” refers to the practice of purchasing a portion of a single share of stock rather than buying an entire share. This can be a great way for individual investors to gain exposure to the stock market without needing to come up with a large amount of capital upfront. If you’re interested in buying fractional shares, this guide will provide an overview of the key concepts and considerations to keep in mind.
What Are Fractional Shares and How Do They Work?
A “fractional share” is a term used to describe a portion of a single share of stock. For example, if an investor wants to buy a share of stock that is currently trading at $100, but they only have $50 to invest, they could purchase a half-share or a “fraction” of the stock.
Fractional shares can be purchased through a brokerage account, with most of the traditional brokerage firms like Schwab, Fidelity, and E-trade now offering the service. Some online-only brokers like Robinhood have made it even more popular as it enables its users to buy fractional shares on their platform.
Why Buy Fractional Shares?
One of the main benefits of buying fractional shares is that it allows individual investors to gain exposure to the stock market with a smaller amount of capital. This can be particularly beneficial for investors who may not have enough money to purchase an entire share of a more expensive stock. By buying a fractional share, investors can still benefit from any potential gains in the stock price without needing to invest a large amount of money upfront.
Another benefit of buying fractional shares is that it allows investors to diversify their portfolios more easily. By buying a variety of fractional shares in different companies, investors can spread out their risk and potentially reduce their overall exposure to market volatility.
Another advantage of fractional shares is that it allows the investors to invest on a regular basis through the practice of dollar-cost averaging. This strategy implies that investors can invest a set amount of money regularly in the stock market, regardless of the market conditions, which also helps them to build a diversified portfolio over time.
What To Consider When Buying Fractional Shares
When buying fractional shares, there are a few key considerations to keep in mind. First and foremost, investors should carefully research the company whose stock they are considering purchasing. This includes looking at the company’s financial statements, management team, and overall business prospects.
Investors should also consider the overall risk level of the stock. Some stocks may carry a higher level of risk than others, which may not be suitable for all investors. Therefore, it is always important to ensure that the fractional share of stock is aligned with the investors’ risk appetite and overall investment strategy.
SoFi professionals say, “With fractional trades, one can easily buy shares in real-time for an amount as little as $5.”
Read Also: What Is the Ideal APR for a Credit Card?
Buying fractional shares can be an excellent way for individual investors to gain exposure to the stock market without needing to come up with a large amount of capital upfront.
However, it’s vital to be well-informed and consider the key factors before making any decisions. By thoroughly researching the company, considering the risk level, and comparing brokerage fees, investors can make a more informed decision about whether buying fractional shares is right for them. Additionally, fractional shares provide investors with the advantage of dollar-cost averaging, allowing them to build a diversified portfolio over time which can be beneficial in the long run.
