How to buy fractional shares? A comprehensive guide by Digimagg

Learn how to purchase fractional shares with a comprehensive guide provided by Digimagg.

May 14, 2024 - 12:17
May 14, 2024 - 12:18
How to buy fractional shares? A comprehensive guide by Digimagg
Fractional shares

If you've ever desired to invest in a specific company's stock but lacked the funds for a full share, or sought to diversify your investments effectively, fractional shares offer an affordable entry point. These shares enable investors to purchase a portion or fraction of a stock based on a dollar amount they can afford, rather than a specific number of shares. This approach is advantageous for investors with limited initial capital who aim to construct a diversified portfolio. We'll delve into how investing in fractional shares operates and address essential queries to aid investors in initiating their journey.

How to buy fractional shares?

To purchase fractional shares, you'll need to establish an investment account through either an online broker or a robo-advisor. The key distinction lies in the level of control you desire over your fractional share investments. With an online broker, you have full control over selecting which fractional shares to invest in, whereas a robo-advisor offers a more hands-off approach. With a robo-advisor, you can specify your investment amount and goals, and the platform will automatically select fractional share investments and rebalance them to align with your investment objectives.

Step 1: Research your desired fractional shares. Different brokerages offer varying fractional share options, so knowing which stocks you wish to invest in via fractional shares can aid in selecting the appropriate brokerage.

Step 2: Open an online broker or robo-advisor account. Not all platforms provide fractional shares, so ensure the chosen company offers this service. Additionally, note that each brokerage may have distinct nuances in their fractional share offerings, including eligible stocks, trade execution and settlement processes, and fees.

Step 3: Fund your account. Once your account is open, you'll need to deposit funds into it. While many online brokers support electronic funds transfer for funding, it may take a few days for the funds to settle, delaying immediate investment.

Step 4: Manage and monitor your investment. Most online accounts offer intuitive dashboards for portfolio monitoring. You can typically view all holdings at a glance and access advanced features like stock alerts or automatic rebalancing, depending on your chosen brokerage's offerings.

Compare leading platforms for investing in fractional shares

 Platform Fractional share purchases Fractional dividend reinvestment Available securities
Fidelity Yes Yes Over 7,000 stocks and exchange-traded funds (ETFs)
Interactive Brokers  Yes  No  Over 11,000 stocks, ETFs, and American Depositary Receipts (ADRs).
Charles Schwab Yes  Yes  Only stocks listed in the S&P 500 index, excluding ETFs.
Robinhood Yes Yes ETFs and stocks that exceed the specified volume and size criteria

Are there any disadvantages associated with fractional shares?

While investing in fractional shares offers numerous advantages, it's essential to acknowledge some potential drawbacks:

  • Limited stock selection: Not all publicly traded stocks are available for fractional share purchase. Each brokerage has its own curated list of eligible stocks.
  • Challenges with transferring fractional shares: When transferring accounts between brokerages, you might encounter difficulties with transferring fractional shares. Liquidating fractional shares may be necessary before initiating a transfer.
  • Limited proxy voting options: Proxy voting policies for fractional shares vary among brokerages. It's advisable to understand your brokerage's policy regarding proxy voting beforehand.
  • Additional fees: Some brokerages impose extra charges for fractional share investing, potentially reducing profits, particularly for low-dollar investments. Understanding the fee structure—whether flat fees or percentage-based—is crucial.
  • Trade execution timing: If your brokerage doesn't execute trades in real-time, it may impact your cost basis. Some firms consolidate fractional share trades into bulk orders rather than settling each one individually, potentially affecting prices throughout the trading day.
  • Complexity in tax returns: Acquiring fractional shares may result in holding various tax lots, complicating tax returns. Additionally, if dividends are automatically reinvested, managing multiple tax lots becomes more challenging.

Key considerations for investing in fractional shares

Considerations for investing in fractional shares include:

  • Stock and ETF availability: Each brokerage offers a distinct selection of stocks and ETFs for fractional share investing. It's essential to review this beforehand, as offerings may vary. Some brokerages provide fractional shares for individual companies or ETFs, while others may not. Check the list of fractional share stocks and ETFs offered by each brokerage before opening an account.
  • Fees and commissions: Brokerages may have different fee structures for fractional share investing. Some may offer commission-free trading, while others may charge additional fees. Understand the brokerage's fee policy before opening an account.
  • Account minimums: Many brokerages have no minimum account requirements. Investors can often purchase fractional shares for as little as $1. However, account minimums may vary among brokers.
  • Research tools: After opening an account, investors gain access to research tools provided by the brokerage. These tools include analysts' assessments of companies, aiding in investment decision-making.
  • Educational resources: Understanding investment strategies, financial goals, and account features is crucial. Brokerages offer educational content to help investors make informed decisions and utilize account amenities effectively in monitoring investments.

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