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Shares of valuable companies can be expensive, especially hot ones like Amazon and Google. One share of Amazon currently costs over $1,800, so what’s the best way to make that happen, plus make sure your portfolio is diverse? Fractional shares could be your solution.
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What are Fractional Shares?
Fractional shares are smaller portions of a stock equal to less than one share. Buy small fractions of shares and you can quickly build up a diverse portfolio of stocks without using mutual funds or ETFs. Fractional shares can sometimes be created after a 3/2 stock split or when a dividend is issued and immediately reinvested in a security.
Say you have 20 shares of SPY, the SPDR S&P 500 ETF. Currently, that’s a $5,500 investment at $280 per share. The SPY also has a 1.83% dividend yield, which means you’ll get about $5 in dividends per share for the year (or $1.25 each quarter). You also want those dividends reinvested into the ETF, but you only own 20 shares for about $50 in dividends per quarter. The share price is $280, but you’ll be allowed to buy 0.1785 shares of SPY with the $50 dividend you get each quarter.
If you have a dividend reinvestment program (DRIP) with the mutual funds in your 401(k), check out exactly how many shares of each you own. You might be surprised to find a number that stretches out three decimal places.
How You Can Benefit from Fractional Shares
- Great for new or underfunded investors: Fractional shares offer a big boost for young investors, and now brokerage firms offer them up for purchase on the open market. You can quickly build a 50-stock portfolio without dropping $10,000 to open the account.
- Eligible for dividends: One of the biggest benefits of buying stock from an established company is the consistent income it provides through dividends. When a company pays a dividend, it returns a portion of its profits to shareholders once every quarter. Fractional shares are eligible to receive these dividends as well, so you don’t need to own full shares to access this income.
- Every penny can be invested: Ever get annoyed by that little bit of cash in your account that’s too small to buy a full share? With fractional shares, you can put every available cent into the market and leave nothing idle in your brokerage account.
- Traded just like whole shares: Buy and sell fractional shares in the same manner as whole shares. There’s no minimum amount you have to buy or sell, and orders can be placed anytime during an open trading session.
What to Look out for with Fractional Shares
Not all aspects of trading fractional shares are positive. Here are a few drawbacks to buying pieces of shares instead of whole ones:
- Can’t be traded on any brokerage: If you purchase fractional shares from your brokerage, chances are you will have to sell those shares on that same brokerage. Many brokerages do not support trading fractional shares, which limits how much trading can be done by the average investor.
- Smaller purchases can lead to more fees: You won’t have to pay expenses to a mutual fund or ETF managers, but you’ll still need to pay brokerage commissions. Those commissions could be quite high if fractional shares are purchased repeatedly in small quantities.
Where You Can Buy Fractional Shares
Here are some great brokerages where you can buy fractional shares of stocks. It’s a mix of robo advisors and traditional brokerages.
Note that if you automatically reinvest dividends, fractional shares will show up from time to time in your brokerage account. You also might get a partial share after a 3/2 stock split, but brokerages often eat the remainder and give you cash instead.
1. M1 Finance
The pie is an investing method offered by M1 Finance that allows investors to set certain percentages on their account and buy stocks to meet those percentages.
For example, if you decide that you want 20% of your portfolio to be VOO, the Vanguard 500 ETF, then M1 will buy shares equal to 20% of your capital, including fractional shares if necessary. Or you can simply open an account and buy your fractional shares on your own, for free.
2. Charles Schwab
Anytime you buy fractional shares through Schwab Stock Slices, you can buy a single slice or up to 10 slices for as little as $5 per slice. Schwab Stock Slices operate on a commision-free basis, as with regular stocks.
If you already have a Charles Schwab account you can buy fractional shares now. If you don’t have an account, you can create one here.
The stocks available through Schwab Stock Slices are in the S&P 500 which includes the 500 leading large-cap U.S. publicly traded companies.
3. Folio Investing
Folio Investing is an innovative brokerage that offers a flat monthly rate for trading with no commissions on transactions.
The firm always engages in what it calls “window trading,” a process in which similar orders are rounded up and executed at specific times during the trading session. This way, Folio offers fractional share trading without a fee.
Fractional shares are a great way for you to put every dollar to work when constructing a portfolio. You can get exposure to a broad range of securities. However, be sure you aren’t overtrading and as a consequence, racking up commissions. Make sure your broker has a reasonable list of fees, otherwise it defeats the purpose of fractional shares.
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