What Are Fractional Shares?
In recent years, investing has become increasingly accessible to anybody with a computer and an internet connection. One of the latest in a long line of innovations designed to open up the world of investing is fractional investing.
But what are fractional shares? How do they work? And are they worth it? In this article, we will take a look at these questions and also demonstrate how to buy fractional shares!
Table of Contents
What Are Fractional Shares?
A fractional share is a partial share of a company’s stock. In other words, instead of owning one share, fractional share ownership means that you can own a portion, or a fraction, of a share.
Fractional shares have existed for a long time. However, historically, investors only really wound up owning fractional shares unintentionally, for example as a by-product of a stock split or share consolidation. For years, brokers only facilitated the purchase of full shares.
That is now changing..
More and more brokers are making it possible to invest in fractional shares directly, allowing investors to choose exactly how much money they want to invest in a company without being restricted by share price.
How Do Fractional Shares Work?
Many of the world’s most popular stocks often sell for high prices. For example, at the time of writing, one share of Meta Platforms (formerly Facebook) trades for more than $500.
For beginner investors, with a limited amount of funds to build a portfolio, $500 may seem like too much money to invest in one stock.
However, fractional shares allow investors to buy just a fraction of a share, meaning that they could invest in Meta Platforms for a fraction of the cost. For instance, with Meta, instead of buying a whole share for $500, an investor could buy half a share for $250, or a quarter of a share for $125, and so on.
Essentially, fractional share ownership works the same as normal stock ownership. Investors take on the same risk and are subject to the same percentage gains and losses as if they owned a full share.
Are Fractional Shares Worth it?
Although percentage gains and losses are the same as normal stock ownership, the real money value gains and losses on a portfolio of fractional shares will naturally be a fraction of the value. Besides this, what are the fractional shares pros and cons?
Benefits of Buying Fractional Shares
Fractional share investing opens up an enormous amount of opportunity to a much wider audience, in particular younger and beginner investors.
It allows investors to hold positions in companies whose share price would otherwise prohibit them from doing so. It also allows beginner investors to start investing with less money and experiment building a portfolio without risking as much capital. Over time, beginner investors can use fractional stocks to increase their exposure and begin to build up a sizeable portfolio for the future.
Furthermore, one of the most important rules of risk management is portfolio diversification. Fractional shares provide investors with more options to diversify their holdings and to do so for less money.
Finally, fractional share investing allows greater options for dollar cost averaging. Dollar cost averaging is a system where investors regularly invest a fixed amount of money over time, in order to smooth out market volatility and build up a position without trying to time the market.
Dollar cost averaging is more effective when you are regularly investing the same amount of money as opposed to buying the same number of shares. Fractional shares allow investors to do this easily, by picking an exact amount that they wish to invest in a company.
Disadvantages of Fractional Investing
Of course, fractional investing is not all positives; there are some potential downsides to buying and selling fractional shares, such as the following:
-
Limited Options
- It is only available on a limited selection of stocks and Exchange-Traded Funds(ETFs).
-
Shareholder Voting Rights
- This will vary depending on the broker, but many brokers that offer fractional shares won’t let their owners vote on company issues until they own a full share.
-
Liquidity
- Buying and selling fractional shares may not provide the same liquidity as whole shares. This is because many brokers that offer fractional shares will wait to accumulate a sufficient amount of orders to buy or sell a whole share. Therefore, if the fractional stocks you are buying or selling are not in high demand, you may have to wait longer for your order to be completed.
-
Not Transferable
- Fractional shares are typically not transferable. In other words, if you want to switch brokers, it is unlikely you will be able to transfer any fractional positions to your new broker.
How to Buy Fractional Shares
At Admiral Markets, we are excited to be able to offer our Invest.MT5 account holders the ability to buy fractional shares in more than 700 of the world’s top companies!
Investors can buy fractional stocks in increments of 0.01 and there is no minimum order value! Commissions do apply, which you can check in the Contract Specifications section of our website.
With Admiral Markets, buying fractional shares works in the same manner as buying whole shares. Follow these simple steps in order to get started:
- Open an Invest.MT5 account and log in to the Dashboard.
- Open the web trading platform.
- Search for a stock in which you want to buy fractional shares.
- Press create new order and enter the desired trade volume in the section highlighted blue in the image below. It is possible to buy fractional shares in increments of 0.01. Once you have selected a volume, hit ‘Buy’ to send your order to the market.
Investing with Admiral Markets
With an Invest.MT5 account from Admiral Markets, you can buy fractional shares in more than 700 of the world’s leading companies. Besides fractional investing, investors will also be able to invest in more than 4,500 stocks and over 200 Exchange-Traded Funds (ETFs) from around the world! Click the banner below to find out more:
FAQ
Do you get dividends on fractional shares?
Yes, fractional shares of dividend stocks pay dividends on a pro rata basis. In other words, you will receive dividend payments on dividend stocks in proportion to the fraction of the share you own.
What happens to fractional shares during a stock split?
During a stock split, fractional shares will be split by the same ratio as regular shares. For example, if you own half a share of a company which splits its stock by 2-for-1, your half share will become one full share. However, remember that stock splits in themselves do not have an impact on the value of your holding. So, in this example, your new full share would worth the same as your half share was before the stock split.
Can you buy fractional shares in the UK?
Yes, many brokers, including Admiral Markets, offer fractional investing to UK clients. With an Invest.MT5 account, UK investors can buy fractional shares in more than 700 of the world’s top companies.
Do you pay taxes on fractional shares?
Fractional shares are subject to the same tax treatment as whole shares. This means that, depending on your location and where the stock is listed, you may be required to pay tax when purchasing or selling fractional shares. If you are unsure of tax implications when investing, you should consult your local tax authority or speak with a tax specialist.
About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
