What Are Fractional Shares?
In recent years, investing has become increasingly accessible to anybody with a computer and an internet connection. However, at the same time, many of the most popular, big-name stocks are coming at increasingly higher prices, which are prohibitive to many would-be investors.
This is where fractional share investing comes in, one of the latest in a long line of innovations designed to open up the world of investing to as many people as possible. But what are fractional shares? How do fractional shares work? And how can you invest in fractional shares? These are just some of the questions we will be answering in this article.
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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 only 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 have 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 bound by the individual share price.
How Do Fractional Shares Work?
As we mentioned at the start of the article, many of the world’s most popular stocks often sell for high prices.
Take Amazon, for example, one of the largest and most popular companies in the world; at the time of writing, a single share in the e-commerce giant would set you back over $3,000.
That is a lot of money and for many it is too much money to invest in one go.
Even if you have $20,000 to construct an investment portfolio, if you wanted Amazon to be a part of that portfolio, at $3,000, a single share would equate to 15% of your holdings, which is a fairly high percentage for any one investment.
However, with fractional shares, you could invest in Amazon for a fraction of the cost. For example, instead of a whole share, with fractional share ownership, you could purchase half a share, a quarter of a share or even less! Usually, brokers that offer fractional shares will allow investors to purchase shares in increments of 0.01.
Fractional share ownership works the same as normal stock ownership. You take on the same risk and will be subject to the same percentage gains or losses as if you owned a full share.
Are Fractional Shares Worth it?
You might find yourself wondering, “are fractional shares worth it?”
It is true that, 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 also be a fraction of the value. However, there are several benefits of buying fractional shares.
Benefits of Fractional Share Ownership
Fractional share trading opens up an enormous amount of investing 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 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 worrying about timing the market. Dollar cost averaging is more effective when you are regularly investing the same amount of capital as opposed to the same amount of shares. Fractional shares allow investors to do this.
Disadvantages of Fractional Share Investing
Of course, fractional investing is not all positives; there are some downsides to buying and selling fractional shares, such as the following:
- 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.
- 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 shares you are buying or selling are not in high demand, you may have to wait longer for your order to be completed.
Do Fractional Shares Pay Dividends?
Yes, fractional shares of dividend stocks do pay dividends on a pro rata basis.
In other words, you will receive dividends in proportion to the fraction of the share you own. For example, if you own half a share, you will receive half the per-share dividend payment made by the issuing company. If you own a tenth of a share, you will receive a tenth of the dividend; and so forth.
Invest in Fractional Shares with Admirals!
At Admirals, we are pleased to announce that we have recently joined the ranks of brokers that offer fractional shares to their clients!
With our Invest.MT5 account, you can now invest in fractional shares! Clients can buy fractional shares in all the constituents of these top stock indices (index constituents as of December 2021):
- S&P 500
- Nasdaq 100
- Dow Jones Industrial Average
- FTSE 100
- DAX 40
- CAC 40
- IBEX 35
In total, that amounts to over 700 stocks in which investors can buy fractional shares!
Investors can buy fractional shares in increments of 0.01 and there is no minimum order value. Commissions do apply, which you can check in the Contract Specification part of our website.
However, with our no commission offer for stocks, Invest.MT5 account holders will be entitled to one commission-free stock trade every day! The offer only applies to the first one-side deal each day, where a one-side deal refers to the opening or closing of a position (other fees may apply as per the Contract Specification).
Furthermore, Admirals execute all fractional share orders in real-time, meaning that you will not find yourself having to wait for Admirals to accumulate a certain number of orders before yours is completed!
In order to start buying fractional shares, click the banner below to open an Invest.MT5 account today!
Admirals 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.