What Exactly Are Fractional Shares?
Since the U.S. stock market crash, spurred by the Coronavirus Pandemic in early 2020, a new wave of investors has poured into the financial colosseum. These investors are largely younger, beginner investors who are keen to grow their money, but are starting with limited capital. Innovations within the world of FinTech have made investing more accessible to everyone, including novice investors who are keen to start small. One of these new investment trends that has surfaced in recent years: Fractional Share Investing.
Amazon, Netflix, Tesla, and Walmart may be far from being penny stocks, but thanks to fractional share trading, investors can access partial shares of these in-demand high-priced stocks without needing to invest thousands of dollars.
Below we share everything you need to know about Fractional Shares, and whether they may be a great addition to your portfolio.
Fractional Shares: A Primer
Fractional shares are parts or portions of a stock that cost less than the price of the single share. They allow the investor the flexibility to decide the amount of money they are willing or can afford to invest in a given company. For example, Amazon is worth $3,074.96 (March 19, 2021). So, if you wanted to purchase $25 worth of the online retail juggernaut, you would own 0.8 percent of a share. Moreover, if it is a dividend-paying stock, you can earn a fractional portion of the monthly or quarterly income, too.
There are numerous benefits to Fractional Shares:
- Gain greater access – Instead of being limited to investing in a handful of penny stocks, Fractional Shares opens up a wider pool of investments to those starting with limited capital.
- More control – Fractional Shares let investors purchase stock based on a dollar amount they select rather than the prevailing share price.
- Manage risk exposure – Fractional Shares allow you to invest in precise amounts of specific shares to build a diversified portfolio and manage your risk exposure.
How to invest in Fractional Shares?
In the past, there were four complicated ways to own Fractional Shares:
- A stock split — when the business increases the number of shares available in the open market.
- A dividend reinvestment plan – when your dividends are paid out as fractions of shares.
- A merger or acquisition of a company – when companies merge or are acquired which results in fractions of shares for the eventual shareholders.
- Through an intermediary – when you own a mutual fund share or index fund, which entitles you to a proportional share in the underlying basket of securities.
Today, online brokerage platforms offer a direct way for buying Fractional Shares which are typically commission free and provide for greater access, control and risk management compared to the four traditional ways.
If you’re somebody that holds your money in a checking or savings account, Fractional Shares may offer you the opportunity to put that money to work in a productive way. The Federal Reserve has already signaled that it will not raise interest rates for another couple of years, and so the benefits of investing are potentially higher compared to keeping your money sitting idle in a checking or savings account.
Investing in Fractional Shares through Finch
If you’re looking for a simple way to invest in Fractional Shares, consider Finch. Finch lets you invest in Fractional Shares of stock & bond ETFs.
By providing personalized investment recommendations and automatically investing your deposits, we ensure your entire balance is always working for you, from day one, no matter what your balance is. When you deposit or spend, we use Fractional Shares to rebalance your investment portfolio to keep you at your portfolio mix. This makes it easy to manage your personal finances, save for retirement, and your financial goals! Finch further pushes the envelope by enabling customers instant access to their money when they need it.