For small investors, a slice of a stock might be better than none at all.
That, at least, is the theory behind the purchase of fractional shares, investments that represent less than a full share in well-known companies trade on major exchanges like the NYSE or Nasdaq.
Fractional shares can be purchased from a number of online brokerages, often commission-free, and they can come in handy, especially for investors who want to own individual stocks with high per-share prices, like Amazon (currently trading at $3,030) or Google parent Alphabet ($1,426).
Of course, fractional shares aren’t for everybody and there can be drawbacks, so it’s important to do your homework before investing. Here are a few things to consider about fractional shares.
What are fractional shares?
Fractional shares can be a good way for investors to get their feet wet in the market, financial advisors say. They make sense for someone who has limited money to invest but who wants to directly oversee their portfolio rather than rely on a mutual fund manager to pick stocks or invest in a benchmark-tracking index fund.
“This is a lower-stakes way to learn how to manage money,” says Jason Blackwell, chief investment strategist of The Colony Group, a registered investment advisor.
When considering fractional shares, it’s important for investors to diversify, says Joshua Simpson, a Lady Lake, Fla., financial advisor. This can be accomplished by buying partial shares across a variety of industries including technology, healthcare, and consumer cyclicals.
If you aren’t willing to put in this work, an S&P 500 index fund is a good low-cost alternative, he says. You should always remember: Investors who buy individual stocks are unlikely to beat the market. To maximize returns, many experts recommend scrapping individual stocks altogether in favor of low-cost index funds.
These cautions aside, seasoned investors can also benefit from fractional shares. Interactive Brokers, a brokerage firm headquartered in Greenwich, Conn., tends to work with customers that are mostly sophisticated do-it-yourself investors and institutions, says Steve Sanders, executive vice president of marketing and product development.
Some investors would rather buy an even dollar amount of a company, say $1,000, vs a specific number of shares, or they want to own at least a piece of a stock they might not otherwise be able to afford, he says, offering the example of Berkshire Hathaway, whose Class A shares have been trading of late at more than $300,000. (Class B Berkshire shares are less expensive, at about $208.)
How to buy fractional shares
There are a number of online platforms where fractional shares can be purchased, and each has its own rules and restrictions. There can be differences, for instance, in minimum purchase limits, commissions or fees, and which stocks and ETFs are available for purchase as fractional shares.
Something else to consider before purchasing fractional shares is whether the platform lets you transfer the shares to another broker, or whether you have to liquidate the position, which is common. Based on the dollar amounts, there probably won’t be huge tax implications for selling, but it’s still something to think about before you buy, says Blackwell, the Colony Group advisor.
Another consideration: There’s not always a huge demand for fractional shares, so sometimes brokers will wait to sell until they can accumulate enough fractional shares to create a full share or multiple full shares, says Simpson. Keep this in mind if liquidity is an issue.
It’s also advisable to ask the brokerage whether investors who own fractional shares have voting rights because the answer can depend on the platform. This is an especially important question to ask if having a voice in the governance process is important to you, Blackwell says. He also recommends consumers who are new to investing choose a platform that will help them become more educated about the process.
Where to buy fractional shares
While not an exhaustive list, here are a few places where fractional shares are available for purchase.
Betterment Fractional Shares:
Utilized in all investing portfolios. Positions can be down to 1/1,000,000th of a share to reach target allocation.
Fidelity Fractional Shares:
Fidelity offers these in its brokerage accounts. You can buy as little as $1.
Interactive Brokers Fractional Shares:
Fractional shares are available to all its customers, which includes individuals, investment advisors, brokers, hedge funds and proprietary traders. There is no minimum purchase.
M1 Finance Fractional Shares:
Available to all M1 Finance account holders and almost any U.S. exchange-traded stock or ETF can be purchased in fractional shares. You can buy as little as $1.
Robinhood Fractional Shares:
Allows investment in stocks and ETFs with as little as $1. Fractional shares on Robinhood can be as small as 1/1000000 of a share.
Schwab Fractional Shares:
Schwab offers these in its brokerage accounts. The minimum for a single transaction is $5, and the maximum is $10,000 per transaction.
Stockpile Fractional Shares:
Allows the purchase of more than 1,000 stocks and ETFs at a cost of 99 cents per trade.
The post Fractional Shares Are the Latest Craze for Small Investors. Here’s How They Work appeared first on Money and is written by Cheryl Winokur Munk
Original source: Money