Do you dream about owning shares in Amazon or Tesla? Believe it or not, even at about $3,000 and $1,500 each, respectively, it’s more attainable than you might imagine. There’s a leveling of the playing field when it comes to stocks. Increasingly you can buy fractional shares. Think of it as buying a slice of pizza instead of the whole pie.
Interested? Here’s what you need to know.
Why are fractional shares trending?
Many tech and other popular stocks are extremely expensive for a single share. This can be prohibitive to younger investors and others with limited capital for investments. “Fractional shares allow these investors to own a piece of the companies that interest them, when they may have been blocked from trading whole shares by the high cost of entry,” says Linda Zhang, senior adviser at SoFi and founder/CEO of Purview Investments in Manhattan.
They’re now more accessible. “Typically they aren’t available to buy from the stock market but can sometimes be purchased from a brokerage firm or a reinvestment plan. They might be created from a stock split or as a result of a merger or acquisition. More brokers have recently started offering fractional shares trading or share ‘slices’,” says Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre.
Explore this investing option
The process is simple. Take for example at Schwab, when clients go to place a trade, there is an option to select Schwab Stock Slices. From there, investors can purchase a single stock slice, or up to 10 different stock slices in a single order.
Once you select the single stock or collection of stocks you want to purchase, the total dollar amount invested is split evenly across each stock, and slices of shares can be as narrow as four decimal places. For example, a $50 investment across five stocks would generally appear as a $10 purchase of each stock, and the order would show the number of shares or fraction of shares that $10 would buy based on stock prices at the time of execution. “Investors can hold fractional shares in as many S&P 500 companies as they wish through multiple purchases,” says Schwab’s chief digital officer, Neesha Hathi, based in San Francisco.
Simply put, they offer an inexpensive way to have a diversified portfolio.
Understand the mechanics
While there are upsides to fractional shares, like all investments, there are downsides to consider.
“Fractional shares are difficult to sell. Because they don’t trade on the open market, the only way to sell them is through a major brokerage. Depending on what kind of demand there is for that stock, it could take a while to sell fractional shares because the brokerage firm will likely join them with other fractional shares until they combine into a full share to sell together,” Zimmelman says.
Unlike with whole shares, with fractional shares you don’t have voting rights on company decisions. Know too, if you’re moving assets from one brokerage firm to another, you can transfer stocks "in kind," meaning you can move stocks from one broker to another. You may need to sell the share prior to transferring them and you may face tax consequences. "With fractional shares, at least at our firm, you need to sell the shares prior to transferring them — which could have tax consequences,” says Steve Sanders, executive vice president of marketing and product development for Interactive Brokers in Greenwich, Connecticut.
You also want to watch out for additional fees. “Not all providers charge something additional, but they have the ability to do so,” says Charles Thomas, III, a certified financial planner with Intrepid Eagle Finance in Clover, South Carolina.
When trading fractional shares, be sure that the market maker/brokerage firm is able to get you an execution price on the fractional shares that is as good as the whole shares. “You should also ask if the dividend distribution on fractional shares is proportional to that of the whole shares,” Zhang says.
Don’t get caught up in a day trading frenzy. Says Jeremy Quittner, money expert and editorial director of Stash in Manhattan, “Don’t ignore your personal goals and time horizon. Before you decide which investments to include in your portfolio, it’s important to think about why you’re investing, and your goals. These goals can help determine your asset allocation, as well as the type of investment account to choose.”