One of the biggest innovations in online brokerages during the past few years has been the rise of fractional shares. Buying fractional shares lets investors choose to buy stocks without having to pay the full price for an entire share of that stock. For example, if you want to buy a stock that has a price of $500 per share, but you only want to invest $100, fractional shares will let you use $100 to buy 0.20 shares (or a one-fifth “fraction”) of that $500 stock.
Buying fractional shares isn’t the right choice for everyone, but it could be a good investment strategy for a few types of people and situations.
1. Beginning investors
Fractional shares let you buy stocks with small amounts of money. If you are just getting started with learning about the stock market, and you want to dabble by buying a few stocks in companies that you are interested in, buying fractional shares can be an easy way to invest without committing too much money.
2. “Fun money” investors
Some more-established investors like to have some “fun money” in their brokerage account, where they can pick some individual stocks or try some different investment ideas. Fractional shares can be a good way to experiment with stock picking, even if most of your investments are in diversified index funds. Buying fractional shares gives you some of the fun and intellectual challenge of picking stocks, without exposing too much money to the risks of individual stocks.
3. Investors who want a diversified portfolio of individual stocks
What if you want to buy several individual stocks at once, but you don’t want to commit thousands of dollars? Buying fractional shares can give you the power of diversification. For example, Charles Schwab fractional shares let you buy up to 30 different companies at once with a minimum cash investment.
With Schwab Stock Slices™, you can buy 10 different companies’ stocks for a total of $50, or 20 companies’ stocks for $100, or 30 stocks for $150. All with no commissions. This is a quick and easy way to achieve a blend of diversification in your stock portfolio, while also pursuing the gains of individual stocks.
4. Investors who want to create customized portfolios
Some investors like to invest in specific industries or sectors. What if you wanted to buy stocks of the biggest airlines, or regional banks? If you feel like there’s an economic trend happening that you want to “bet” on, fractional shares can let you build a special portfolio of companies that you want to own.
For example, with fractional shares on Charles Schwab, you could build your own stock portfolios based which industries you think are a good investment for future economic trends:
- Airlines: American Airlines, Delta Air Lines, Southwest Airlines, United Airlines
- Car companies: Ford, General Motors, Tesla
- National banks: Bank of America, Capital One, JPMorgan Chase, U.S. Bank, Wells Fargo
- Travel and tourism: Carnival, Hilton, Marriott, Royal Caribbean
You could even use fractional shares to buy stocks for your favorite restaurant brands, like McDonald’s, Chipotle, and Starbucks. Do you love certain apparel companies like Under Armour, or beauty brands like Ulta? If there are certain publicly traded companies where you spend money regularly, and you believe that those companies are good investments, you can become a shareholder — not just a customer — with fractional shares.
5. Investors who want to use dollar-cost averaging to buy stocks
Dollar-cost averaging is often considered to be a smart investment strategy, because it lets you keep investing consistently with the same amount of money over time. Buying fractional shares is a good way to use dollar-cost averaging to buy individual stocks — because you can just keep buying fractions of shares with the same small amount of cash each month, no matter if the stocks’ prices go up or down.
For example, if you can invest $200 per month into fractional shares for 12 months, you are likely to buy more shares when prices are low, and fewer shares when prices are high. At the end of the year, you’ve invested $2,400 into a wide range of stocks at a wide range of prices. Over time, this can help you accumulate more shares of stock at a lower average cost per share. Investing consistently is often the best way to buy stocks, instead of trying to time the market (and guess when stock prices are “too high” to buy).
Bottom line
Buying fractional shares can pose some of the same risks as buying individual stocks: your stocks might go down in price, or might not grow at the same pace as the rest of the stock market. Buying index funds like the S&P 500 is often a better investment strategy for most everyday people who don’t want to spend time doing investment research and following the ups and downs of the markets.
But if you want to learn more about trading stocks, if you prefer a more “hands-on” approach to investing, and if you’re willing to accept some risks as part of your investing strategy, buying fractional shares can be a good choice. Several major brokers offer fractional shares, including Charles Schwab, Fidelity, SoFi Active Investing, and Robinhood. Check out The Ascent’s best brokers for fractional shares to learn more.
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