Fractional Investing
In the world of investments, the concept of “fractional shares” is a recent innovation. As the name suggests, fractional shares represent a piece, or fraction, of a company’s stock or ETF. If the stock pays dividends to shareholders, owners of fractional shares will receive dividend payments as well. Dividend payments are relative to the percentage of a share you own. So, if you own 3/4 of a share, your dividend payment will be 3/4 the dividend paid to owners of a full share.
In addition to receiving dividends, fractional investing offers several other significant advantages.
Advantages
One of the most significant advantages of fractional investing is that it makes it easier to get started. Fractional investing enables individuals with limited funds to diversify their portfolios and gain exposure to expensive stocks like those of major tech companies or high-growth startups. Firms offering fractional shares give clients the ability to buy or sell partial shares, making investing more accessible.
Diversification, a key part of any investment strategy, is another benefit of fractional investing. Diversification helps spread risk across various assets. For example, instead of using $500 to buy a single share an investor can use that same amount to purchase fractions of several different stocks, spreading their risk and potential for returns. With partial shares, you can build a diversified portfolio without needing a large amount of capital. This allows investors to spread their investments across different assets and sectors, which can help manage risk.
Other considerations
While fractional investing offers benefits, there are also some considerations to keep in mind. Transaction fees and platform costs may vary, and it’s important for investors to understand these possible expenses. Additionally, while fractional shares provide access to a broader range of investments, they may not always offer the same liquidity or voting rights as whole shares.
It’s also important to note that not all firms offer fractional investing. While it has become more popular, some firms or investment platforms still limit their offerings to whole shares, making it less accessible to smaller investors. The fact that not all firms offer fractional investing is one of the biggest challenges for many investors. Without this option, individuals with limited funds are unable to diversify their portfolios as easily, as they may not have enough capital to purchase full shares of certain stocks or funds.
Unlike full shares, fractional shares cannot be transferred between brokerages. If you decide to switch brokers, any fractional shares you hold will be liquidated, which could trigger capital gains and potentially lead to tax implications for investors, although this is not guaranteed.
Conclusion
Overall, fractional shares provide investors with control, flexibility, and efficiency in managing their investment portfolios, allowing for more customized investment strategies. However, as with any investment, it’s essential to consider your risk profile, time horizon, and existing portfolio when making an investment decision. Also, be sure to understand the tax and fee consequences of fractional investing.