By: Bob Haegele
April 4, 2020Investing is one of the best ways to grow your wealth, everyone should consider investing if possible. One great way to do that is to buy fractional shares.
See, some of the best companies have very high share prices, which can be limiting for cash-strapped investors. Fortunately, there is a solution to this problem: fractional shares.
These shares make it easier to invest smaller amounts of money in big companies.
In this post, we’ll dive deeper into fractional shares as well as a few places you can buy them.
What Are Fractional Shares?
Fractional shares are pieces of a stock that are smaller than a full share. In some cases, they can be as small as 1/100,000th of a share.
Some online brokerages give investors the option to invest in these smaller shares. This is ideal for newer investors and those who don’t have a lot of money to invest.
Plus, you can invest the same amount at regular intervals. If you are beholden to the share price, the amount of money you invest will constantly change.
But with fractional shares, you can choose exactly how much money to invest–and where to invest it. As a result, the share price will rarely (if ever) prevent you from investing in your favorite companies.
Fractional shares can also be the result of a stock split, or of a merger or acquisition. The same goes for capital gains, reinvesting dividends (DRIP), and dollar-cost averaging.
How Do Fractional Shares Work?
The way fractional shares work is simple. Instead of having a full share in your portfolio, you have a portion of a share.
Another way to think about it is in terms of dollar value instead of how many shares you have. For example, perhaps you own 0.3359 shares of Google stock. Or you could say you have $750 worth, which may be a lot easier to think about.
Either way, fractional shares don’t typically work much differently than whole shares. You simply have a non-whole number of shares. If you ever want to buy or sell fractional shares, you can deal in dollar amounts instead of number of shares; M1 Finance fractional shares allow you to do that.
What Are the Benefits of a Fractional Share?
There are several benefits of investing in this way. Let’s take a look at the advantages of fractional shares.
Increased Flexibility
One of the biggest benefits of fractional shares is increased flexibility. Because you aren’t limited to saving up for full shares, you can invest in every company you want at any given time.
For example, Google’s share price is approaching $2,000 as of right now. If you wanted to invest $500, you would have to wait until you have nearly $2,000 to buy one share.
With fractional shares, you can invest $500 in Google. Or, you can invest $250 in Google and $250 in Amazon.
In reality, you can invest in dozens of companies with just $500. With fractional shares, the possibilities are almost endless.
Invest All Your Available Cash
Many people like to have a small amount of money in a bank account or savings account. This isn’t a bad idea because while that money will earn little to no interest, it will always be there if you need it.
Thus, many investors prefer to keep six months’ expenses in cash for emergencies.
The problem? Inflation makes your dollars less valuable over time. While this isn’t so terrible for a small emergency fund, it’s probably not what you want to happen to your investment dollars.
But if you could only buy full shares, it would be unlikely you could invest all of the cash in your brokerage account.
Diversify Your Portfolio
It’s always a good idea to diversify your portfolio. As the saying goes, you should never “put all your eggs in one basket.”
While this can be a good thing when a company’s share price is on the rise, it wouldn’t be so nice if the share price is falling.
And if a company goes bankrupt, you certainly wouldn’t want all your money invested in it.
That is an extreme example, but it illustrates the importance of diversifying. Most of us would be quite limited if we had to invest in full shares of Google stock.
With fractional shares, you can easily invest in dozens of companies every time you transfer money in. By doing so, you set yourself up for long-term success while minimizing risk.
How to Buy and Sell Fractional Shares
These days, many different financial services companies offer robo-advisors and trading apps. One of the benefits of that is many of them also offer fractional shares.
We’ll take a look at a couple of them below.
M1 Finance
M1 Finance is a financial services company that lets you buy stocks through its website and the M1 Finance app. Trading is commission-free through M1 Finance. That means you won’t pay any fees when you buy stocks and ETFs.
M1 uses a unique pie-based approach that lets you specify what percent of your portfolio each investment should occupy. Thus, you can invest exactly how much you want with M1 fractional shares. In fact, M1 lets you buy fractional shares as small as 1/100,000th of a share.
You can buy shares of stock, bonds, ETFs, or even M1’s expert pies. Any of these asset classes can be added to your portfolio with the allocation you want.
For example, you might create a portfolio of:
This is a sort of random example – not one that necessarily makes sense in the real world.
However, the point is that if you could add these four different types of investments to your portfolio.
Then, any time you add money, M1 Finance will use fractional shares to make sure each investment matches your percentages.
In other words, the share price of each investment is irrelevant thanks to fractional shares.
Betterment
Betterment is a robo-advisor that simplifies the process of investing. It’s the oldest robo-advisor around today, having officially launched in 2010.
When creating your portfolio, you set a stock/bond allocation (i.e. 80%/20%) and Betterment does the rest. Once your allocation is set, all you have to do is add money to your account.
Much like M1 Finance, Betterment investing allows you to buy fractional shares as small as 1/100,000th of a share.
What’s different about Betterment is you don’t have much control over the particular stocks or funds in your portfolio. However, this can be a good thing for newer investors or those who don’t want to spend time researching investments.
Betterment has more recently specialized profiles, such as:
- Blackrock Target Income Portfolio
- Goldman Sachs Smart Beta Portfolio
- Socially-Responsible Portfolios
All of these portfolios give you different options. So while you won’t be in complete control over your investments at Betterment, it does give you some level of choice.
How do they compare?M1 Finance vs. Betterment
Acorns
Acorns is known for rounding up purchases and investing your spare change. All you have to do is link a debit card or credit card and you can start rounding up.
The app won’t invest your money immediately. Instead, it waits until you have at least $5. Still, you won’t find an ETF you can buy for just $5 without fractional shares.
It’s worth noting that roundups are Acorns uses to differentiate itself. However, it does allow you to set up automatic, recurring investments.
It also has five different risk profiles and invests your money in a combination of ETFs depending on how much risk you prefer.
» These are just some of the most popular choices for fractional shares. For more ideas, see our list of the best robo-advisors.
Are Fractional Shares Worth It?
Fractional shares are worth it, especially for the average investor. However, one downside is that they aren’t easy to transfer from one brokerage to another.
You can’t simply initiate a rollover if you want to do this. You will likely have to liquidate your shares, transfer the cash equivalent, then invest your money with your new broker.
And that could mean capital gains taxes and potentially other penalties.
One reason people sometimes change brokers is to save on fees. Still, if there are going to be significant tax implications for moving your money, you should take that into consideration.
Buy Fractional Shares: Conclusion
If you buy fractional shares, it can be a game-changer. They can help you be more flexible, diversify, and avoid a cash drag in your portfolio.
Just keep in mind that moving your money from one brokerage to another can become complicated if you have fractional shares.
Overall, fractional shares are a great way to invest your money without share prices holding you back.
If you plan to buy individual stocks, using a service like M1 Finance can help you avoid having to buy full shares each time you invest.
