Buying shares in a company is like buying a slice of the pie. But with fractional shares, you get a slice of the slice.
This is a beginner’s guide to fractional shares so you can make smart investing decisions and get the most out of your hard-earned money:
What are Fractional Shares?
Fractional shares are partial shares of a company’s stock. Instead of buying the whole share, you buy a part, or a fraction of a share.
With fractional shares, you decide how much money you want to invest, rather than the number of shares. For instance, if a stock costs $100 and you want to invest $200, you can buy 1/5th of the given share. When you buy fractional shares of stock, you can gain exposure to multiple companies and build a diversified portfolio. This includes Google, Facebook, Tesla, and more.
Where Did Fractional Shares Even Come From?
Before we delve into the features of fractional shares, let’s consider why fractional shares even became a thing.
The price of stocks is one of the biggest challenges new investors have to face. Take, for instance, the Class A shares of Berkshire Hathaway. They trade for over $400,000 a share. Paying nearly half a million for a single stock doesn’t seem very beginner-friendly. Then you have companies like Google and Facebook that trade for thousands of dollars per share.
Therefore, fractional shares were introduced to make investing more accessible.
Ways Fractional Shares Are Formed
Fractional shares are formed as a result of numerous moves, such as:
Dividend reinvestment plans (DRIP)
A DRIP lets investors automatically reinvest cash dividends into additional shares. Dividend reinvestment plans are generally offered by a corporation or a brokerage.
Stock splits
Stock splits often result in an uneven number of shares. For instance, a 3-for-2 stock split would create three shares for every two shares you already own. As a result, you would end up with a fractional share after the split.
Mergers and acquisitions (M&As)
Fractional shares are often created after M&As. Since two companies combine new stock using a predetermined ratio, shareholders end up with fractional shares.
Do Fractional Shares Pay Dividends?
Yes! Fractional shares pay dividends just like any other stock. Payments are calculated depending on the percentage of a share you own. For instance, if you own 1/5 of a share, your dividend payment will be 1/5 of the dividend paid to owners of a full share.
How to Invest in Fractional Shares
The first thing you need to do is find a brokerage that offers fractional shares. Many online investment platforms, such as SoFi, offer fractional shares for as low as $5.
You should also check the terms for available stocks and ETFs, as well as minimum investment amounts. Some platforms also incur additional fees.
Next, complete your Know Your Customer (KYC) process and fund your account. You can buy a portion of a share by entering the dollar amount you wish to invest.
Review and confirm the details, and you’re good to go!