How to Invest in Big Companies with Fractional Shares | Investing for Beginners

• When beginning to invest, your investment budget may not be enough to purchase the big-name companies, such as Amazon or Tesla.
• Fortunately, you can still own a portion of these companies by purchasing fractional shares. 
• Fractional shares allow you to hold a position in big companies at a fraction of the cost, and they are offered through several different brokerage companies.

When starting to invest, you may not have enough money to purchase the shares from companies you desire. For example, Amazon (NASDAQ: AMZN) may be on your list of companies you want to invest in, but their stock price (currently listed at $112.91 as of 02/02/23) may be out of your investing price range.  

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Investors and brokers know that not everyone may be able to purchase these stocks due to the large amounts of money it costs to buy one share. Thus, brokers offer fractional shares to be bought or sold to accommodate investors who do not wish to spend their entire portfolio on one share worth a significant amount of money. 

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How to Purchase Fractional Shares

If you wish to buy or sell fractional shares, you need to open an online brokerage account. Online brokerage accounts are where these types of shares are traded. Unfortunately, they are not available via your regular trading account. 

Once you have set up your online brokerage account, then you can begin purchasing fractional shares. However, it is essential to know that depending on the brokerage platform you have chosen, your choice of buying these shares may vary. 

How to Sell Fractional Shares

The process of selling fractional shares is somewhat similar to that of a regular share. You have to submit a request through your brokerage account to initiate the process when you wish to sell your shares. However, the duration of the process takes longer than selling whole shares as brokerage companies cannot sell fractional shares individually. 

As fractional shares cannot be sold individually, brokerage companies must wait until enough shareholders have put in a request to sell their respective shares. Once enough people have put in a request, and the accumulated fractional shares are equal to or exceed one whole share, the process can be executed.  

Once the sale of the whole share(s) has gone through, the allocation of the sale amount is dependent on the percentage owned by each shareholder when making the collective sale. 

Benefits of Investing via Fractional Shares

The main benefit of purchasing fractional shares is that it allows you to invest in well-established and reputable companies. Another advantage of investing in fractional shares is that companies will still allow their fractional shareholders to receive dividends on their investment. As a result, purchasing fractional shares will still allow you to receive passive income. 

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Furthermore, purchasing a number of shares whose share price is thousands of dollars can be challenging. However, purchasing fractional shares can help you buy shares of stock without investing in the whole share. When you own a fractional share, you own a small piece of equity in a stock or exchange-traded fund that is less than a full share, allowing you to use the rest of your money to diversify your portfolio. 

Disadvantages of Investing via Fractional Shares

The main disadvantage when it comes to buying fractional shares is that they may be hard to sell. As fractional shares are not sold on the stock market, investors must wait until their brokerage company obtains a full share through other investors who also wish to sell their fractional shares. As this process may take a long time, it could be challenging to sell the fractional shares quickly. 

Inflation of a stock price could also pose an issue to an investor. With fractional shares being implemented through different trading platforms, like Fidelity and Charles Schwab, the opportunity for investors to invest in fractional shares may result in short-term inflation of the stock price, causing the investor to make a poor investment decision.

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Which Companies Offer Fractional Shares?

As mentioned before, companies themselves do not offer fractional shares on the stock market, and the only place that these types of shares can be purchased or sold is through an online broker. With that being said, depending on the brokerage platform you use to purchase these types of shares, the number of companies varies. 
 

Two examples of brokerage platforms that offer fractional shares are Fidelity and Charles Schwab. 

Brokerage Companies that Offer Fractional Shares

According to Bankrate, below are some brokerage companies that offer fractional shares to their customers and the different number of companies this service is available for:

Charles Schwab

Fractional Purchases: Yes

Fractional Dividend Reinvestment: Yes

Number of Companies in the Program: Roughly 500, including all of the stocks listed on the S&P 500

Fidelity Investments

Fractional Purchases: Yes

Fractional Dividend Reinvestment: Yes

Number of Companies in the Program: More than 7,000 stocks and ETFs

Interactive Brokers

Fractional Purchases: Yes

Fractional Dividend Reinvestment: No

Number of Companies in the Program: More than 11,000 stocks, ETFs and ADRs

Robinhood

Fractional Purchases: Yes

Fractional Dividend Reinvestment: Yes

Number of Companies in the Program: Stocks that have a share price over $1 and have a market capitalization of over $25 million, and ETFs

TD Ameritrade

Fractional Purchases: No

Fractional Dividend Reinvestment: Yes

Number of Companies in the Program: More than 5,000 stocks, ETFs, and mutual funds

E-trade

Fractional Purchases: No

Fractional Dividend Reinvestment: Yes

Number of Companies in the Program: Thousands of stocks and ETFs

Merrill Edge

Fractional Purchases: No

Fractional Dividend Reinvestment: Yes

Number of Companies in the Program: Thousands of stocks, ETFs, and mutual funds

Vanguard

Fractional Purchases: Only in mutual funds

Fractional Dividend Reinvestment: Yes

Number of Companies in the Program: Stocks, ETFs, and mutual funds

Alternatives to Fractional Shares - Mutual Funds

Investing in fractional shares is not for everyone for a number of reasons. Fortunately, there are alternatives to fractional shares if you wish to purchase shares in companies that may be out of your investing budget. 

The primary alternative to fractional shares is mutual funds. Mutual funds operate by taking a pool of their clients’ money who, individually, cannot purchase shares of well-known companies.

By pooling their money together, they are giving them the opportunity to hold equity in some of the world’s highest-valued companies. In addition, mutual funds are an alternative to fractional shares. Instead of letting each investor choose which companies to invest in, mutual funds are managed by experienced people in the financial markets. 

By choosing to invest in mutual funds, whatever gains and losses made on the investments made by the mutual fund will be split accordingly between the pool of investors. 

Fractional shares are a great stepping stone when embarking on your investment journey. No one starts by putting four, five, or six-figure deposits when they are first beginning out. Typically, as the amount of money invested will be small initially, fractional shares allow you to invest in those companies that are more established and reputable, which can help you grow your portfolio until your investment deposits increase in value.

Disclaimer: The information explained in the article should not be considered as investing advice. Always do your research before investing in any stock.

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