Every once in a while, we want to diversify our investments and purchase certain stocks of companies that we believe in. Not as part of ETFs but on their own. Unfortunately, some companies are simply too expensive for someone to purchase even a single share. Some companies might have a share price of less than a dollar; however, there are some companies, such as Berkshire Hathaway A shares (BRK A) which can be hundreds of thousands of dollars per share. If you are interested in owning a slice of these companies, do you really have to purchase a full share? The answer is: not necessarily. You might be able to purchase a fractional share. Question is, how to buy fractional shares?
An Overview of Fractional Shares
A fractional share is exactly what it sounds like; instead of purchasing an entire share, you can buy a fraction of one share. It could be half of a share. It could be a quarter of a share. If you can buy fractional shares, you don’t necessarily have to spend the money for an entire share of an expensive company, such as Amazon or Google. If you can invest a modest amount of money, you have more control over how and where you invest your money in the stock market. How do you purchase fractional shares?
Stock Splits and Dividend Reinvestments Are the Most Common Way Investors End Up with Fractional Shares
Until recently, the way most investors ended up with fractional shares had to do with stock splits and dividend reinvestments.
If you have a stock portfolio and your portfolio is set to automatically “reinvest dividends,” you will automatically buy more shares of a company when that company sends you dividends. If the money you get from a company in the form of dividends is not enough to purchase an entire share (or multiples of entire shares), then you will purchase a fractional share with your dividends. That is why after a few quarters of reinvesting dividends, you might notice fractional shares in your portfolio.
The other way you might end up with a fractional share is from stock splits. If a stock splits two to one or three to one, you might end up with an odd number of shares. While some companies will automatically sell your fractional share, this might not happen. This is another way you could end up with fractional shares.
Now, you might be allowed to purchase fractional shares on your own through certain brokers. Which brokers allow you to purchase fractional shares?
For a long time, Charles Schwab has been one of the top online brokerage firms. Now, they allow investors to purchase fractional shares. Right now, Schwab’s “Stock Slices” program will enable you to buy a slice of any company in the S&P 500 Index. While you can still invest in S&P 500 index funds through Charles Schwab, you can also purchase individual companies for as little as $5, providing you with more control over your investing strategy. In addition, Schwab still allows you to place trades through the Stock Slices program without paying a commission. If you collect dividends from your stock slices, you can reinvest those as well, purchasing more fractional shares.
Right now, there are approximately 500 securities available in the S&P 500 Stock Slices program.
It should come as no surprise that Fidelity also has a fractional share purchase program, as they are one of Schwab’s main competitors. One of the top options, Fidelity has a program called Stocks by the Slice. You can get started in the program with as little as $1. There are more than 7,000 stocks and ETFs available in the program. You can purchase these stocks without having to pay any commission. You can also reinvest your dividends to buy even more shares, whether using stocks or ETFs.
There are more than 7,000 securities and ETFs available in Fidelity’s program. This may grow as the program expands.
Robinhood has been known for offering its commission-free trading program since its inception. Popular among the younger generation, it has been expanding its user base. Now, you can buy the tiniest fraction of a share, buying as little as 1/1,000,000 of a share. You can invest as little as $1 per share. You can also reinvest dividends into fractional shares; however, this is not the default option. You have to enable this feature first.
While not all securities are enabled through the Robinhood program for fractional shares, there are countless options available.
While this program has been popular among professional brokers and day traders, its user base is growing. Now, Interactive Brokers offers a fractional share program as well. The cost is either $1 per share or the tiered rate offered by the broker of that specific security. There is also a Lite program available that offers free trading. There are ETFs, and foreign stocks enrolled in the program as well.
Right now, there are more than 9,000 stocks, ADRs, and ETFs available in the program; however, there is no option to reinvest fractional dividends.
Fractional Share Purchases Are Growing
With more people looking to get involved in the stock market, the sheer price of purchasing a single share has been a major barrier to countless people. Now that brokers are able to offer fractional shares, more people are able to start investing in the market, using their money to make money. It will be interesting to see if there are other programs that get involved in the future, creating more opportunities for the average investor.
Should I be buying fractional shares?
Now that you know how to buy fractional shares, you have to realize that it might not be for you. It definitely shouldn’t be your primary strategy. You might be better off with a diversified portfolio and not individual stocks or slices of shares. If you are looking for portfolio ideas, check out our investment guide or portfolio ideas.
That said, if you have a plan and are disciplined, buying fractional shares could be a great addition to your overall investments.