Fractional Shares: Like Pizza for Your Money

Fractional Shares: Like Pizza for Your Money

Test drive owning stock in all your favorite companies by buying a portion of one share.

Jul 27, 2021
Fractional Shares: Like Pizza for Your Money

Another Tesla Model S whizzes by, driving itself on autopilot right past the gas station it never needs to stop at, while you sputter along in your Nissan wishing you could afford your very own Tessie. You can’t yet, but you decide to buy some stock in Tesla for now so you can own a little piece of the company in the meantime—and who knows, with some smart money moves, maybe you’ll work your way up to that Model S. After all, your favorite podcaster just called Tesla a hot pick.

You get home and search for “Tesla stock” and let out an exasperated sigh: $600 per share. You only have $200 to invest.

In the past, not having enough money to buy a full share would be game over. Now, you get to keep playing—thanks to fractional shares.

What are fractional shares?

A fractional share is exactly what it sounds like: a fraction of one share. In other words, it’s anything less than a full share of ownership, or equity, in a company. 

When a corporation decides to sell itself to the public in the form of stocks, it splits that public ownership into individual shares. For example, a corporation may sell off $10,000 in ownership split up into 100 shares that cost $100 each. The ability to buy fractional shares, or a portion of one share, means you can specify an actual dollar amount you want to invest rather than having to invest in multiples of $100.

For example, if Tesla shares are currently at $600 and you only want to invest $200, you can buy ⅓ of one share. That’s a fractional share. If you wanted to invest $1,000 in Tesla, you could do that too, and you’d have 1.67 shares ($1,000 divided by $600 per share).

Fractional shares are relatively new and only an option with some online brokers like Robinhood, Stash, and Fidelity. With many other brokers, you can only buy full shares. In the case of the Tesla example, that means you’d have to invest in increments of $600. So you could buy one share for $600 or two shares for $1,200—but nothing in between and nothing less than $600.

Do I earn the same returns with fractional shares? Can I sell fractional shares?

You’ll still earn returns proportional to your investment with fractional shares, just as you would if you purchased whole shares.

If you’d purchased ½ of one share in Tesla back in January 2020 for about $44, you’d have roughly $440 one year later when the stock price peaked. If you’d purchased a whole share for about $88, you’d have $880 a year later.

Let’s say you decided to quit while you were ahead in January 2021—you want to sell your ½ share and cash out that $440. All you have to do is place a sell order with the broker where you purchased the ½ share. You’re still about $68,980 short of a new Model S, but you did manage to 10x your money with a very low initial investment cost.

Are fractional shares worth buying?

You probably won’t build a nest egg big enough to quit your job and retire to Barbados by buying fractional shares. However, there are plenty of worthwhile advantages to snatching up small portions of one share in various stocks.

You can invest in your favorite companies with spare change

Fractional shares make investing in big name stocks accessible to everyone. Now you can own stock in Tesla, Nike, and Apple without having to set aside hundreds of dollars to get started.

It’s a great way to test drive your stock market skills

If you’re new to the world of picking stocks, you probably don’t want to play around with large sums of money. Hone your skills with a few dollars here and there, see what works, and then lean into that with larger dollar amounts.

Putting $1 here and a $1 there makes your investments less likely to crash

When you’re able to buy small slices of a stock, you can more easily mix up your investments. That same $600 you would’ve spent on Tesla stock can now go toward Tesla, Apple, Nike, Disney, Starbucks, and Netflix. This is called diversification, and it lowers your risk as an investor. If one company’s stock tanks, you’ve still got money in several others.

What’s the catch? Can buying fractional shares be bad?

There’s really no catch to buying fractional shares, but there are a couple obstacles to avoid on your spare change investing journey.

Avoid commission fees

Many brokers charge commission fees when you buy stocks. While these might only be 1% or 2% of your purchase, having to pay fees every time you want to spend a few dollars on a stock makes buying fractional shares less worthwhile. Look for commission free trading apps if you want to invest with fractional shares.

Avoid overvalued stocks

If your only reason for buying stock in a company is because their share price is high, you might want to rethink your strategy. If you’re trying to get enough money for that Tesla, you want to buy stock in companies you believe are undervalued, because that means their stock will increase in value over time—and so will your shares. Now that it’s easier to buy fractional shares in big-name companies, more people might be doing so out of brand recognition rather than actual value. This can lead to their stock being overvalued.

However, there are still plenty of companies with expensive stock that still make for a smart investment. While you could buy a couple dozen shares in Nokia stock for less than one share in Apple stock, that doesn’t make Nokia a better investment (even if your dad does still have a flip phone). 

That’s why fractional shares are so useful. You can go ahead and buy stock in Apple, even if you only have $10 to spend.

Where to buy fractional shares

The best places to buy fractional shares are online brokers that 1) allow you to buy fractional shares, and 2) offer commission-free investing. Here are a couple of our favorites.

 

Pick your faves: SoFi

SoFi’s fee-free, all-in-one investing app lets you pick and invest in individual stocks with as little as $1. Their platform makes it easy to buy stocks by dollar amounts rather than shares, and they even throw in free financial planning.

sofi

SoFi

4.3

Robo Advisor

Let someone else do the heavy lifting: M1

You’ll need at least $100 to start investing with M1, but this platform lets you buy fractional shares and doesn’t charge any commission. The big draw of M1 is their investing algorithm, which completely automates your investments according to your own personal lifestyle and money goals.

m1

M1

4.3

Robo Advisor

Read more

How to Invest in NFTs (and Profit Off Your Meme Obsession)
How to Invest in NFTs (and Profit Off Your Meme Obsession)
Investing in non-fungible tokens (NFTs) is easier than you think.
Passive Income Explained: YouTube Scam or Legit Money-Maker?
Passive Income Explained: YouTube Scam or Legit Money-Maker?
Is passive income the not-so-secret weapon of the 1%? Yes.