Investing in the stock market used to feel like an exclusive club for the wealthy. But that’s no longer the case. Even if you don’t have enough funds but want a piece of an expensive share, it’s possible to buy a fraction of it rather than the whole thing.
But while fractional shares have opened doors for beginners and budget-conscious investors, they’re not perfect. With every benefit of a financial tool comes risks and challenges.
Let’s explore the pros and cons to help you decide if taking micro slices of a share is right for you.
Fractional shares are exactly what they sound like – a fraction of a full share of stock. Instead of needing, say, $500 to buy a single share of a company, you can invest $50 or even $5 and own a proportional piece of that share.
Many online brokerages, such as SoFi, let you invest in fractional shares, making it easier for investors to diversify their portfolios without having to empty their wallets.
And because you’re cutting pieces of a whole share and sharing it with other investors, all the other perks that come with owning a share are shared as well.
What makes it appealing to trade fractional shares for newbie investors or those with a limited budget is the:
Affordability
One of the biggest advantages of buying fractional shares is obvious. They make investing accessible and affordable. You don’t need to wait until you can afford an entire share of that huge company.
Fractional shares allow you to jump in with whatever amount you can pitch in. The portion you own will depend on that.
Easy Diversification
Imagine you have $100 that you want to invest. Instead of putting it all into one stock, you can spread it across multiple companies using fractional shares.
Doing so will also spread your risk, helping you earn more in the long run.
Beginner-Friendliness
If you’re new to investing, fractional shares let you test the waters with minimal commitment. You can start building good financial habits and learn through practice.
Efficient Dividend Reinvestment
Many dividend reinvestment programs (DRIPs) use fractional shares to reinvest dividends, even if the amount is too small to buy a full share. This means that nothing goes to waste.
Fractional shares might not work for everyone, especially if these factors are bigger concerns for them.
Limited Broker Transferability
If you ever want to move your portfolio from one brokerage to another, fractional shares can be a hassle. Many brokers don’t support transferring them, so you may have to sell the shares off first.
Lack of Stock Availability
Some brokers only allow fractional shares on select stocks or ETFs. Your dream investment might not be offered in slices.
Restricted Voting Rights
In many cases, owning fractional shares doesn’t give you the same shareholder rights as full-share owners.
Psychological Misjudgment
Since fractional shares feel like low-risk investing, some people may start treating them like a game. Buying random stocks instead of following a strategy almost always goes wrong.
Luys Parker