As mentioned in the Stock Moe YouTube Channel
In his videos, Stock Moe often talks about buying fractional shares. So, what are fractional shares exactly? First, let’s start by talking about other types of fractions. A pizza, for example, is an example of something that is divided into fractional shares. How? One piece is one fractional part. There are usually 8 slices that make up the entire pizza. Another example is a puzzle. A puzzle is divided into pieces which are the fractional parts.
With fractional shares, it means pretty much the same thing. According to Forbes, a fractional share allows the investor to buy expensive stocks and ETFs in smaller increments.(Marquit How do fractional shares work?) Let’s take a look at an example. Let’s say that you want to purchase a share of Goldman Sachs Group Inc, which, at the time this article is written, costs $347.27 for one share. Perhaps the cost of this stock is too expensive for you to purchase one or multiple shares at once. What you may then do is find a broker who sells fractional shares so that you may purchase just a small portion of a share at a time. Maybe you only are able to put $20 in at a time. You can do that with fractional shares.
Why would you want to buy into fractional shares? Just as was mentioned above, perhaps you are starting with a small sum of money. Stock Moe has mentioned in the past that purchasing fractional shares will allow you to buy into higher cost stocks, even if you only own a portion of it. Also, perhaps you want to buy into multiple stocks at a time, but you cannot afford full shares of all of them. Then buying fractionally allows you to diversify your money into multiple stocks instead of just putting the money into one at a time. Maybe you want to purchase TSLA, Amazon, VOO, GS, and FB. They cost $831.25, 3003.95, 342.92, $347.27, and $202.08, respectively, at the time of the writing of this article. If you add those up, it would cost you $4,727.47 just to purchase one share of each.
With fractional shares, you can put in a set amount of buy over time, better known as dollar cost averaging, a common method of investing that Stock Moe himself uses in his own portfolio. So let’s say you set your buy amount to $250 per week ($50 into each stock). It would take you awhile to get up to a full one share of each of those stocks. However, if you continue to do that, you are going to reach full shares of stocks in your Facebook position rather quickly, whereas a stock like Tesla might take you quite a bit longer. However, the nice part about fractional shares is that it IS possible. Therefore, some of the stocks that an average investor may think are not within their reach actually ARE using fractional shares.
There is a minimum amount of money that an investor must invest in fractional shares. They must invest at least one dollar. Fractional shares may be bought out to three decimal places, too, as long as that value is equal to or greater than one dollar. So for Tesla, you actually COULD just invest a little over one dollar. You would have to buy .002 of a share and it would cost you $1.66 using the price from above. You would not be allowed to buy only .001 of a share of Tesla, because at its current price, it would cost only 83 cents which is less than one dollar. You COULD buy .001 of a share of Amazon which would cost you $3.
Where can you buy fractional shares? Below are some of the major brokers that Stock Moe would recommend checking into if you want to buy fractional shares.
1. Charles Schwab
Charles Schwab is a broker who actually recognized Stock Moe as one of the top financial education teachers in the United States, so of course I had to include them in this list. Charles Schwab has a nifty name for their fractional shares which is trademarked: Schwab Stock Slices. Schwab does have a minimum purchase amount of $5 for purchase of fractional shares. Therefore, depending on the price of the stock, the percentage of the stock that you buy will be different. If you put $5 into a $20 stock, you would be purchasing 0.25 of a share. If you put $5 into a $100 stock, you would be purchasing 0.05 of a shares of that stock. They allow you to buy any stock in the S&P 500.
2. Interactive Brokers
We are listing this one especially for our international followers, since it is tough to find brokers who offer fractional shares in 220 different countries and territories, with offices present in the following: U.S., Switzerland, Canada, Hong Kong, U.K., Australia, Hungary, Russia, Japan, India, China, Luxembourg, Estonia, Singapore, and Ireland. (Folger Interactive brokers review). With an Interactive Brokers account, you need to enable the ability to trade fractional shares. First, you would want to create an account and then enable fractional shares. Interactive Brokers mentions the fact that an investor may divide their investment into more stocks which may create a more diversified portfolio. Their fractional share purchases do not have a fee with them, but there are some restrictions on what stocks you may trade. Fractional shares may be purchased on Interactive Brokers if they are “U.S. stocks listed on NYSE, AMEX, NASDAQ, ARCA, or BATS, as well as OTC Pink U.S. penny stocks with average daily volume above $10 million and market cap above $400 million.” (Fractional shares trading interactive brokers LLC)
Robinhood is another broker that can be used to purchase fractional shares. Like Interactive Brokers, they offer commission-free investing. Their website states that an investor may invest any amount, build a balanced portfolio, and trade in real time.(Commission-Free Stock Trading & Investing app) Robinhood has some similarities and differences in their user agreement in comparison to other brokers. Like Interactive Brokers and Charles Schwab, fractional shares start at a one dollar minimum. However, on Robinhood, a fractional share is rounded to the sixth decimal place. (Fractional shares addendum – robinhood)
In conclusion, there are many different options for an investor who does not have a lot of money when starting their portfolio. There are other brokers that may offer fractional shares to their investors, but Stock Moe recommends and/or uses the ones cited in this article. You may begin today buying fractional shares to help with dollar cost averaging and good diversification.
“Commission-Free Stock Trading & Investing App.” Robinhood, https://robinhood.com/us/en/?utm_source=google&utm_campaign=12057657002&utm_content=124253804619&utm_term=529818166022__robinhood+fractional+shares__e&utm_medium=cpc&gclid=Cj0KCQiA09eQBhCxARIsAAYRiym3gvJFqYEC7XlzH4lsHe008RKItmhO10tspw8mA6gokQUVsLplMQoaAnhMEALw_wcB.
Folger, Jean. “Interactive Brokers Review.” Investopedia, Investopedia, https://www.investopedia.com/interactive-brokers-review-4587904.
Fractional Shares Addendum – Robinhood. https://cdn.robinhood.com/assets/robinhood/legal/Addendum%20(FINRA%201-28-20).pdf.
“Fractional Shares Trading Interactive Brokers LLC.” Interactive Brokers LLC, https://www.interactivebrokers.com/en/index.php?f=45718&gclid=Cj0KCQiA09eQBhCxARIsAAYRiym29pLvfi-7g76xt_-tk7FyKJYceuV46Vrs_OaHx2Xv8XuXir0RKcgaAtMeEALw_wcB.
Marquit, Miranda. “How Do Fractional Shares Work?” Forbes, Forbes Magazine, 10 Dec. 2021, https://www.forbes.com/advisor/investing/fractional-shares/.