When investing in the stock market, it can be difficult for investors to put all of their money to work or to invest in all of the stocks they want if they are only able to buy entire shares of stock. Fractional shares have solved some major pain points for investors, so here's a rundown of what a fractional shares are, why they're important, and how they work in the real world.
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What are fractional shares?
What are fractional shares?
As the name suggests, fractional shares are less than a full share of stock. For example, if you buy half a share of Walt Disney (DIS -1.24%), that would be an example of a fractional share. If you own a fractional share of a stock, you are entitled to a proportional amount of the gains of holding a full share, as well as a proportional amount of any dividends paid by the company.
To be sure, fractional shares have some drawbacks. As one example, you generally don't get voting rights with fractional shares (although this isn't likely to be an issue for smaller investors). Some brokers restrict when you can sell fractional shares – for instance, only allowing fractional share orders to fill overnight when the market is closed. And you may encounter small fees for fractional shares.
It's also worth mentioning that fractional shares have been around for a long time, but they were typically only allowed as a tool for dividend reinvestment. In other words, if you received a $50 dividend from a company and elected to reinvest your dividends, you'd be allowed to receive as many shares as possible (even fractions) that $50 could buy.
Why are they important?
Why are fractional shares important?
Fractional shares are important because they eliminate two major pain points for investors, especially newer investors or people who typically invest relatively small amounts of money at a time.
First, it allows investors to put all of their money to work at once. As an example, let's say that you put $500 into your brokerage account and you want to invest in Berkshire Hathaway (BRK.A 0.38%)(BRK.B 0.05%), which trades for approximately $364 per share as of August 2023.
If your broker doesn't allow fractional share trading, you would only be able to buy one share, and the additional $136 would remain in your brokerage account. On the other hand, fractional share trading would allow you to use your entire $500 deposit to buy about 1.37 shares of Berkshire Hathaway stock.
Second, it allows investors with relatively small amounts of investable cash to buy whatever stock they want. As an example, MercadoLibre (MELI 0.36%) trades for about $1,300 per share as of this writing. Unless you have that much cash available, you can't afford to buy any shares if your broker doesn't allow fractional shares. However, if they do allow fractional share investing, you could add MercadoLibre shares to your portfolio for as little as a few dollars.
Should you buy them?
Should you use fractional shares to invest?
The short answer is that you should absolutely use fractional shares to invest if they're available to you. Not all brokers allow fractional share trading, so if you're a new investor or you simply want the ability to buy less than one full share of stock on occasion, it may be a good idea to find a broker that supports fractional share trading.
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Example
Real-world example of fractional share investing
Let's say that I deposit $1,000 into my brokerage account and want to split it evenly among shares of Apple (AAPL 0.92%), Berkshire Hathaway, Amazon (AMZN 0.49%), and Tesla (TSLA -0.02%) to start my stock portfolio. As of this writing, the share prices of each of these companies, rounded to the nearest dollar, are:
- Apple - $180
- Berkshire Hathaway - $363
- Amazon.com - $140
- Tesla - $250
If I had a brokerage account that did not allow fractional share investing and I had $250 to invest into each, I would end up with one share each of Apple, Amazon, and Tesla and I would have $430 left in my brokerage account.
On the other hand, if my brokerage offered fractional shares, I could put all $1,000 of my money to work with 1.39 shares of Apple, 0.69 shares of Berkshire, 1.79 shares of Amazon, and one share of Tesla. Not only would I be able to invest 100% of my money, but I'd have equal-sized positions in all four companies.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Matthew Frankel, CFP® has positions in Amazon, Berkshire Hathaway, MercadoLibre, and Walt Disney. The Motley Fool has positions in and recommends Amazon, Apple, Berkshire Hathaway, MercadoLibre, Tesla, and Walt Disney. The Motley Fool has a disclosure policy.
FAQs
There are no major drawbacks to fractional shares. But it is worth taking into account the fact that this does not really increase profit potential by itself. A larger investment in a single share that goes up in value is of more benefit than a smaller one in multiple stocks that do not go anywhere or that go down.
Are fractional shares worth anything? ›
For some investors, fractional shares are worth it because it means they can own a part of a stock from a company they are interested in, without committing to buying a whole share. While fractional shares have much in common with whole shares, they don't trade on the open market as a standalone product.
Can you make good money on fractional shares? ›
Long-Term Investors
Individuals with a long-term investment horizon can use fractional shares for dividend reinvestment and gradual asset accumulation. This approach can help accumulate wealth and compound returns over the years.
What is the point of fractional shares? ›
Fractional shares democratise access to markets, allowing new investors and those wishing to spread their funds across multiple assets and asset classes options to buy and sell, without needing huge amounts of money upfront.
Why are fractional shares hard to sell? ›
The only way to sell fractional shares is through a major brokerage firm, which can join them with other fractional shares until a whole share is attained. If the selling stock does not have a high demand in the marketplace, selling the fractional shares might take longer than hoped.
Do you pay taxes on fractional shares? ›
For the purpose of taxes, fractional share rewards are considered in the same way as all of your other investments in your Public account. What that means is that if you sell your free slices of stock and realize a capital gain, that must be reported as taxable income.
Which broker is best for fractional shares? ›
Best online brokers for buying fractional shares:
- Charles Schwab.
- Fidelity Investments.
- Interactive Brokers.
- Robinhood.
- E-Trade.
- Merrill Edge.
- Vanguard.
- Tastytrade.
Cash in lieu of fractional shares is a type of payment that investors get for the sale of fractional shares. This tends to happen after a company restructures stock with a stock split, a merger or acquisition and a spin off. If you get a payment outside of a 401(k) or IRA plan, you will have to pay capital gains.
Do you still get dividends on fractional shares? ›
Fractional shares allow you to invest in stocks based on a dollar amount, so you may end up with a fraction of a share, a whole share, or more than one share. Do fractional shares pay dividends? Yes, proportionate to the percentage of the share you own.
Is buying fractional shares smart? ›
Reasons to Buy Fractional Shares
From high-growth tech stocks to stable blue-chip companies, fractional shares provide affordable options for smaller investors. Diversification: Instead of concentrating your available funds into a few stocks, you can spread your investment across a broader range of companies.
In most cases, as an investor you'll work through a middleman (usually a brokerage firm) to sell fractional shares. The firm may take your fractional share and bundle it together with others until it has a whole share to sell, or it may resell your fractional share to someone else who wants it.
Does Fidelity charge fees for fractional shares? ›
With Fidelity, you'll pay $0 in commissions for online trades, plus there's no minimum to open an account -- which is why it makes our list of the best brokers for buying fractional shares. You can get started with these four easy steps.
What are the downsides of fractional ownership? ›
Less flexibility and freedom
All decisions about maintenance, repairs and decor must go through all ownership partners, which can be a hassle. If you want to sell a fractional property, the other fractional owners must approve the sale, depending on your agreement.
Is fractional investing a good idea? ›
Are Fractional Shares Worth It? Fractional shares are worth it if you want to start investing with little money and have your eye on some expensive shares you wouldn't normally be able to buy. They're also powerful tools for diversifying your portfolio very quickly.
Do I get dividends from fractional shares? ›
Fractional shares allow you to invest in stocks based on a dollar amount, so you may end up with a fraction of a share, a whole share, or more than one share. Do fractional shares pay dividends? Yes, proportionate to the percentage of the share you own.
