Have you had your eye on popular stocks? The kind of stocks by big-name tech, healthcare or corporate companies like the likes of Amazon (AMZN) and Alphabet, Google’s (GOOG/GOOGL) parent company, but their stock price makes it impossible for you to own? You don’t need thousands of euros to get you started. Now you can own a small piece of these international companies without having to splash out a lot of money.
Fractional shares allow investors to buy a portion of a stock, making it easier to diversify even with small amounts of cash, powering you to put together a portfolio of high-quality investments that include companies and sectors that you find most appealing. Opening the stock market to everyone, fractional share investing has become a game changer, democratizing the market and making it possible for anyone to invest.
Here we dig deeper into what fractional shares are, how they work and why you should get investing in them.
What are fractional shares?
Fractional shares are a portion of an equity stock that is less than one full share. This means that if a stock was split into thirds, there would be three fractional shares. So while an investor can buy parts of a company, known as shares on the stock market, a fractional share can help you access the market at a lower cost and buy a company’s stock even if you can only purchase 1% of one share. Think of it like a pie - the further you cut into it, the further the pie itself will go. While the slices are worth less and less the more you divide them, the value of the overall pie remains the same.
Have a look at the example below:
|Stocks of your choice||Amount invested||Share price *||Share %|
Do fractional shares pay dividends?
Generally speaking, you can purchase fractional shares by simply specifying the amount of money you would like to invest in a particular company and then buy the number of shares your spending power allows you to. Owning just a portion of a share will not remove privileges that come with certain stocks, such as dividends. Just remember that the dividend payment you will receive will depend on the number of shares you own. So if your stock pays $1 for a whole share and you own half a share, your dividend payment would be $0.50.
How can you buy and sell fractional shares?
Fractional shares are offered by mainstream brokers and trading platforms such as Moneybase Invest. You can also invest in these shares through exchange-traded funds (ETFs). At the same time, fractional shares are sold just like any other stock. All you need to do is simply place a sell order with the same broker or investing app and just sell your stake.
How are fractional shares created?
Stock splits: these take place when a share is divided into smaller chunks. Whereas the overall value of the shares remains the same, the market price of individual shares decreases. Companies typically split their stock to boost the stock’s liquidity and to attract a wider pool of investors. Stock splits don’t always result in an even number of shares. So a 3-for-2 stock split would create three shares for every two shares you would own. This means that if you have an odd number of shares, you will end up with a fractional share after the split. As a result, three shares will become 4½, whereas five will become 7½ and so on.
Dividend reinvestment plans (DRIP): these take place when an investor agrees to reinvest their dividends to buy more shares. DRIPs can often result in the purchase of parts of shares. As the amount ‘drips’ back into the purchase of more shares, it may not be exclusively limited to whole shares. At times, reinvesting capital gain distributions and drip-feeding programmes may also result in purchasing fractional shares.
Mergers and acquisitions: fractional shares can also be created when two companies either merge or one buys the other. This typically occurs because companies combine the new common stock using a predetermined ratio and this often results in fractional shares.
Occasionally, some brokerage firms may split whole shares intentionally so that they can sell fractional shares to clients. In this manner, an investor with limited funds who may have their heart set on a relatively pricey stock may invest half of the money to purchase one-third of one of these shares and the other half of the funds could be invested in lower-priced stocks, allowing them to buy full shares.
Why buy fractional shares?
Wondering whether fractional shares are worth investing? For one, these can be a great way to experiment with the stock market, most especially if you are an investment novice and don’t have much money earmarked for purchasing financial instruments. At the same time, fractional shares enable you to own a wider variety of stocks, offering you the potential to grow your money further.
Have a look at these additional advantages:
Invest in stocks that you would otherwise not be able to afford
You cannot afford to trade that $3000 per share stock, let alone buy more than one share at that price? Worry not. With fractional shares you can build the portfolio you want since you can buy the amount of stock you can afford be it $5, $50 or $500.
Benefit from a wider pool of investments
Investors with limited amount of funds typically resort to low-cost stocks, but thanks to fractional shares you can buy a piece of any publicly traded business, including some of the biggest companies in the market like the likes of Facebook (FB), Netflix (NFLX), Airbnb (ABNB), Alibaba (BABA) and others which trade for hundreds of dollars per share. And with the ability to own a slice of any company under the sun, you can opt for those you believe have the best chance of performing over the long-term rather than selecting those you can afford.
Build a diversified portfolio
Building a diversified portfolio is key to investment success as it can help reduce any potential risks since you don’t bet your money on one single company or industry. But building a well-diversified portfolio that contains just a few shares of well-known stocks could potentially mean that you have to make quite the upfront investment. With fractional shares, diversifying your portfolio is less expensive. So if you only had $25 to invest, you can allocate just $5 to buy partial shares of companies from different industries and therefore, achieve diversification rather than investing a lump sum in a single company.
As mentioned earlier on, some ETFs are also available as fractional shares. Interested to invest in ETFs? Have a look at our full range of over 4,000 ETFs available on Moneybase Invest.
Make the most of your investment
You may think that buying a piece of a top stock with just $25 is an insignificant amount, however, your money will instantly start working for you without having to wait for months or even years to amass sufficient funds so that you can purchase the full share. And while the amounts may be small at first, compound interest will work its magic and these initial contributions have the potential to multiply into something significant over years.
How to buy fractional shares with Moneybase Invest
At Moneybase Invest we’re all about making investing accessible to all. This is why we are now offering fractional shares on our platform to provide unique investing opportunities to those who might not be able to participate in the stock market otherwise. And just as is the case with our other instruments, trading fractional shares is quick and easy, at the tap of a button.
With fractional shares, you can invest in stocks with as little as $0.50. You can place real-time fraction share orders, commission-free by simply entering the amount you want to buy or sell in dollars.
Here is how fractional share trading works at Moneybase Invest:
- On the dashboard, head over to the search bar at the top of your screen and input the stock you would like to invest.
- Select the appropriate instrument from the list and then click on the Buy button found on the new window.
- Next, a New Order page will appear. Click on the box under the Buy button to switch from Shares to Value and then in the box right next to it input the value you would like to invest.
- Once you’re done, hit the Place Buy Order button at the bottom of your screen. You now own a piece of your favourite stock!
Access over 4,300 fractional stocks and ETFs with Moneybase Invest and unlock your investing potential. Switch between simple and advanced modes to access features such as Bid / Ask price, Limit & Stop Loss Orders and so much more.
Need help getting started with fractional shares? We’re here for you 24/7. Give us a call on 256 888 88 or send us a message in-app.
Moneybase Invest is brought to you by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business by the MFSA under the Investment Services Act.
Moneybase Invest offers direct market access and speed of execution and is intended for knowledgeable and experienced individuals taking their own investment decisions. The value of investments may go up and down and currency fluctuations may also affect investment performance.
The contents of this article are not intended to be taken as a personal recommendation to invest but strictly based on research and for information purposes only. Retail investors should contact their financial adviser for a suitability assessment prior to taking any investment decisions.