What are Fractional Shares? Unlock Stock Market Access with Tiny Investments

Buying shares of well-known companies like Amazon or Tesla can feel expensive when one share costs hundreds of dollars. Fractional investing makes this possible by allowing investors to buy fractional shares or a fractional stock, instead of purchasing a full share.

This blog explains fractional ownership, how fractional shares work, their benefits for small investors, the risks involved, and how fractional investing helps build a diversified stock portfolio with limited capital.

What are Fractional Shares?

Fractional shares represent segments of a complete stock. Traditionally, stock exchanges have required investors to purchase whole shares, which limited participation for those without substantial capital. Fractional share trading, however, reverses this dynamic by allowing investors to buy smaller portions of a stock.

Investors can invest small amounts of money by converting their cash investment into fractional ownership. Many brokerage firms, such as Robinhood, Fidelity, and Interactive Brokers, have made global investments more accessible. Investors own a portion of an asset based on the amount they invest and will receive dividends and voting rights in proportion to their ownership.

How Fractional Investing Actually Works?

Fractional investing is one of the simplest ways to invest in the market. Here’s how it works:

• Pick a stock (for example, Nvidia at $120 per share).
• Enter the amount you want to invest. For instance, investing $50 approximately 0.42 shares.
• Brokers purchase the fractional share either from their internal pool or directly through exchanges that support fractional share trading.
• Regulators worldwide, such as the Securities and Exchange Commission (SEC) in the United States of America, Financial Conduct Authority (FCA) in the United Kingdom oversee this. Platforms aggregate orders to buy whole shares and then divide them into fractions.
• You see the holding in your account as "Nvidia - 0.42."
• Buying fractional shares is quick and easy through mobile investing applications.

Fractional Shares vs. Whole Shares

To better understand how fractional share investing compares with traditional investing, the following overview highlights the key differences.

Partial shares offer a cost-effective solution to diversification by allowing investors to spread their capital across 10 different blue-chip companies instead of being limited to just two or three shares.

Making Investing Accessible with Smaller Amounts

The true advantage of fractional shares lies in their ability to make the entire market accessible to you, regardless of whether an investor has substantial capital or limited budget. Notably, younger traders (those under 30 years old) account for nearly 60% of new trading activity globally. However, many of them avoid high-priced stocks such as shares of ASML, which are priced at over $800 per share.

Fractional investing allows investors to allocate $100 worth of stocks in Google or Meta via international investing platforms, or to build a global index portfolio incrementally. Fractional ownership has made investing more accessible than ever, enabling participating in top-tier stocks without the burden of high share prices.

Pros of Fractional Share Trading

The following benefits highlight why it is particularly well-suited for beginner investors.

• Lower Barrier to Entry: Start buying fractional shares with your pocket money. Great for students or first-time salaried investors with limited capital.
• Supercharged Diversification: Trade 20+ Stocks with just $1000 - US Tech, European Banks, Asian Giants, and more.
• Smoothens Market Bumps: Dollar-cost averaging (investing a fixed amount of money at regular intervals) helps to even the odds during market ups and downs.
• Worldwide Access: Buy global stocks such as Tesla or Alibaba through online brokerages, including but not limited to Charles Schwab or eToro.

Cons of Fractional Share Trading

You may find some good deals, but fractional share trading also has disadvantages.

• Broker Fees Can Eat into Your Profits: Some brokerage firms will charge you for each fraction you purchase based on their terms and conditions.
• Your Ability to Vote is Limited: The smaller the fraction of a stock you own, the less weight that single vote will carry. For the vast majority of investors, this won't be an issue.
• Availability of Platforms: Availability varies by area, so, if possible, use regulated apps to trade.
• Illiquidity Risk: When trading fractions in volatile markets, selling small positions may take longer than expected.

How to Get Started with Fractional Investing Globally

If you want to buy fractional shares, here are some simple steps:

1. Open a brokerage account (there are several free or low-cost options, such as Robinhood, Fidelity, and Interactive Brokers) to get started.
2. Fund your new account with at least $50.00.
3. Search for the stocks you want to invest in. Once you find them, look for the option to view the stock in "fractional" mode.
4. Click the buy button to purchase the fractional stock.
5. Apps have made it easy to purchase and track your investments using dashboards. For example, to create a steady flow of money into your account, set up a systematic investment plan (SIP) for your fractional stock.

Conclusion

Fractional shares are shaping the future of investing by making financial markets more accessible and inclusive. Investors no longer need large sums of money to get started. They only require the mindset to begin early and invest smartly. Investing in fractional shares may seem like taking very small steps at a time, but it has the potential to make portfolios grow steadily in the long run.