If any benefit to the awful pandemic exists, it’s that the public health crisis taught young people the value of investing. In particular, mobile trading app Robinhood captured what essentially amounted to a hostage audience. Thanks to its compelling interface and gamified platform, Robinhood introduced a new generation to the value of building wealth through stocks.
But what also made the trading app appealing is its myriad features, including the ability to own fractional shares. This guide walks you through the concept of fractional share ownership and why you should consider it for your investment strategies.
What are Fractional Shares?
Many times, the lexicon that you find in the equities sector is confusing if you don’t already have a working understanding. Fortunately, you don’t have to dig deeply with fractional shares. As the name suggests, this concept refers to a less-than-whole unit ownership of a stock.
Financial educators commonly use the example of a whole pizza versus an individual slice. Some folks may not be able to afford the entire pizza and therefore opt for a slice or two. In other cases, the situation may not be appropriate to purchase the entire pie. If you’re on a lunch break, for instance, you want to get in and out without stuffing yourself.
In other words, fractional shares can be a deliberate investment decision and are not necessarily tied to modestly funded accounts. While cost certainly could be the case, even wealthier individuals may opt for fractional equity ownership. If the investor would rather spread his or her capital across high quality (but pricey) blue chips, they may opt for an à la carte approach rather than insist on whole unit acquisitions.
However, fractional shares naturally appeal to younger investors due to their inability to purchase the high-priced shares of the companies they are most familiar with. These include names like Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG, NASDAQ: GOOGL) and Facebook (NASDAQ: FB).
Thankfully, as Cabrini University notes, many brokerages now offer fractional shares. Not only does this facilitate greater functionality for existing clients, it opens the door to young investors such as college students. But as you’ll see, Robinhood extends several advantages that make it a fractional share powerhouse.
How to Use Robinhood
While Robinhood generated plenty of headlines, not all of the stories were flattering. Despite the drama the company found itself in, especially with its questionable actions toward so-called “meme stocks,” Robinhood’s core ethos is true to its namesake.
Seeking to democratize finance for all, what makes Robinhood appealing is that it’s the judgment-free zone for stock market investing. Whether you’ve got tens of millions of dollars to put to work, or just tens of dollars, this platform will gladly extend an invite to you just the same.
Indeed, Robinhood made a killing by simply reaching out to the people that Wall Street wouldn’t give a second glance to, which is a genius move. According to a Gallup poll conducted in 2019 and updated in June 2020, the age 18-to-29 group was the only U.S. demographic where the majority did not own stock.
It’s no wonder why Robinhood elected to deploy an app for its stock-trading service. An app is the medium that young people understand. And as you might expect, the company designed its platform to be incredibly intuitive.
To get started, you first download the Robinhood app. From there, you need the following to start investing:
- Proof of being 18 years or older
- A valid social security number
- An address in the U.S.
Once you load up the app, you can search for the stock (or other tradable asset, such as an exchange-traded fund or cryptocurrency) you want to purchase. Once identified, tap the “Trade” button.
Robinhood will open up a new screen, which gives you the choice to buy or sell. After you hit buy, you then select your order type (i.e., market order or limit order) and input the number of shares desired.
Finally, confirm your order and swipe up to send it through. Congratulations! You’ve just bought your first stock on Robinhood.
Why Trade in Fractional Shares?
Although buying fractional shares affords several advantages, many investors choose not to participate. You have to remember that the market isn’t just a place where the invisible hand of capitalism works its magic. Instead, each trade represents a component of human psychology.
Frankly, there’s something inherently satisfying about purchasing whole units rather than buying fractional shares. While the pizza-versus-slice argument above makes sense, not all assets lend themselves well to partial purchasing.
Even the word itself, stock, implies a whole unit. It’s telling that you need the qualifier “fractional” to describe à la carte investing.
Nevertheless, trading apps like Robinhood should help bring fractional share ownership to the mainstream. Further, it would be a welcome development because buying stock piecemeal offers several advantages.
First, fractional shares allow investors with limited funds to start building wealth, no matter where their starting point is. According to Robinhood’s learning guide, “Investors can buy fractional shares of stocks and exchange-traded funds (ETFs) with as little as $1.”
And which stocks are eligible for such compartmented ownership? Again, from Robinhood’s website, “Stocks worth over $1.00 per share, and which have a market capitalization of more than $25 million, are eligible for fractional shares on Robinhood.”
The drive for high-quality stocks segues into the second reason why investors are increasingly turning to less-than-whole-unit trading: diversification into quality assets.
As you know, Robinhood garnered a reputation over the trailing year as a medium for speculation. While you can buy boatloads of penny stock shares for relatively little money, the old saying applies: you really do get what you pay for.
Sure, a penny stock could jump higher, making you lots of money. But such “investments” have an extraordinarily high failure rate. While it’s possible to buy 30,000 shares of a speculative firm for only $100, such dilution implies gross fundamental weaknesses with the core business.
Instead, it’s better to spread your funds across well-established companies with a long track record of success. But such an endeavor is expensive for the average investor. However, with fractional shares, you can gain exposure to both Amazon and Alphabet without buying each stock outright.
Finally, if you have a set contribution rate (such as $100 per month), buying whole equity units could be problematic as valuations constantly fluctuate. Yet with fractional shares, the anchor point isn’t the share count but your dollar-denominated contribution. This practice makes building wealth in high-quality names especially useful for young investors.
How to Trade Fractional Shares
Just as Robinhood makes buying and selling whole-unit stocks quick and intuitive, the process is likewise straightforward for buying fractional shares. Primarily, the benefit of the Robinhood platform is that it performs the math for you. Therefore, you can choose the dollar amount of fractional shares to purchase or the actual share count.
To trade in dollars:
- First go to the target stock’s detail page and tap “Trade.”
- Next tap “Buy.”
- You’ll see a green word appear in the top right corner, which you should tap.
- Then tap “Buy in Dollars.”
- Enter the dollar amount you’d like to invest.
To trade in shares:
- Start from the target stock’s detail page and tap “Trade.”
- Next tap “Buy.”
- Tap the green word that appears in the top right corner.
- Then tap “Buy in Shares.”
- The minimum amount of shares you can invest in is 0.000001.
If Robinhood doesn’t support fractional ownership of a particular stock, the app will notify you when placing an order.
An Effective Tool for Everyone
Although the psychological impetus may drive you to acquire whole unit shares of publicly traded companies, in many cases, that’s just not possible because of their high stock price. Through fractional ownership, those with a smaller bankroll can buy shares in which they would normally be priced out.
Nevertheless, lack of means isn’t the only reason why fractional shares are relevant. For instance, investors may want exposure to certain securities but not at the full price. By buying piecemeal, you can mitigate your risk and help reduce anxiety.
Finally, fractional shares open up options for diversification. Rather than buying substandard stocks, you can partially purchase several high-quality securities. As well, the fractional approach allows investors to build wealth through fixed-dollar contributions.
Frequently Asked Questions
Is it worth buying fractional shares?
Absolutely. Some popular stocks with strong potential command per-share prices that reach well into four-digit territory. Many investors, particularly young ones, don’t have the capital to spend on whole unit ownership. Therefore, fractional shares allow you to spread exposure to several compelling businesses.
Do fractional shares count as day trades?
It really depends. According to the Financial Industry Regulatory Authority, day trading refers to buying and selling stocks within the same day. As long as you keep your fractional shares longer than a day, that transaction is not a day trade.
About Joshua Enomoto
His distinct writing style of distilling convoluted data into relatable and compelling narratives has earned him recognition among several investment-related publications.