Fractional shares are a relatively new concept in the world of investments that allow individuals to purchase a portion of a stock rather than having to purchase a full share. This is a great option for those who don’t have the financial means to purchase an entire share or would like to diversify their investments without having to spend a large amount of money.
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What are Fractional Shares?
Fractional shares refer to a portion of a stock, which can be as small as 1/100th of a share. This means that investors can purchase any amount of a stock they want, regardless of the stock’s price. In the past, if an individual wanted to invest in a stock but couldn’t afford a full share, they would have to wait until they had enough money to make a purchase. However, with fractional shares, investors can buy into a stock incrementally and gradually build their portfolio over time.
How Do Fractional Shares Work?
Fractional shares work just like regular shares, but instead of owning a full share, the investor owns a portion of the stock. The fractional share represents a portion of the stock’s ownership, dividends, and voting rights. For example, if an individual buys a 1/10th fractional share of a stock, they own 1/10th of the stock’s ownership, receive 1/10th of the dividends, and have 1/10th of the voting rights.
Pros of Fractional Share Investing
Affordability: One of the main advantages of fractional shares is that they allow investors to buy into a stock even if they don’t have the financial means to purchase a full share. This means that individuals with a limited budget can still invest and start building their portfolios.
Diversification: With fractional shares, investors can diversify their portfolios by buying into multiple stocks, rather than having to put all their money into one stock. This helps spread out risk and can potentially lead to a more stable portfolio over time.
Convenience: They are often offered through online brokers and trading platforms, making it easy for individuals to buy and sell shares from the comfort of their own homes.
Flexibility: With fractional shares, investors have the flexibility to purchase any amount of a stock they want, rather than having to purchase a full share. This allows individuals to invest incrementally and gradually build their portfolios over time.
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Cons of Fractional Share Investing
Higher fees: Some brokers may charge higher fees for fractional share transactions compared to full share transactions. It’s important to research and compare the fees charged by different brokers before investing.
Lower liquidity: Because fractional shares represent a smaller portion of a stock, they may be less liquid and harder to sell compared to full shares.
Reduced returns: Fractional shares will provide the same overall percentage of returns compared to full shares. However, as the investor is only owning a portion of the stock, it may only result in very small total returns.
Reduced voting rights: Because fractional shares represent a smaller portion of a stock, the investor will have reduced voting rights compared to someone who owns a full share.
Where to Buy Fractional Shares?
Fractional shares are now offered by many online brokers, trading platforms and robo-advisors, such as Public as part of their investment options. Before investing, it’s important to research and compare the different options available, as fees and services offered can vary between brokers.
In addition to stocks, ETFs (Exchange-Traded Funds) and mutual funds can also be purchased fractionally. This means that instead of having to purchase a full share of an ETF or mutual fund, investors can purchase a smaller portion of the fund.
Micro investing apps, such as Acorns, make it easy for individuals to purchase fractional portions of shares by automating the process. For example, with Acorns, individuals can connect their bank accounts and have small amounts of money automatically invested into a diversified portfolio of ETFs. This means that individuals can start investing with very small amounts of money and gradually build their portfolios over time.
The advantage of purchasing fractional shares of ETFs and mutual funds is that it allows individuals with limited budgets to invest in a diversified portfolio of stocks, bonds, and other assets, without having to put all their money into one stock. This can help reduce risk and potentially lead to a more stable portfolio over time.
It’s important to note that while micro investing apps make it easy to purchase fractional shares, they may also charge higher fees compared to traditional brokers. It’s important to research and compare the fees and services offered by different micro investing apps before making a decision.
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Conclusion
In conclusion, fractional shares offer a great opportunity for individuals to invest in stocks and diversify their portfolios, even if they don’t have the financial means to purchase a full share. With fractional shares, individuals can invest in a stock incrementally, allowing them to build their portfolio over time.
Fractional shares have both advantages and disadvantages. It’s important for individuals to consider their financial goals and budget before investing in them, and to research and compare the fees and services offered by different brokers.
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