Fractional shares, also known as “partial shares,” have become increasingly popular in recent years as a way for individual investors to buy into high-priced stocks without coming up with the full purchase price. This trend has been driven by the rise of commission-free trading platforms, such as Robinhood, that allow investors to buy fractional shares of stock at a lower cost and with less initial capital.
This article will explore everything you need to know about fractional shares, including how they work, their advantages and disadvantages, and how to buy them.
Fractional shares are exactly what they sound like – a fraction of a full share of stock. Instead of buying one full share at the current market price, investors can purchase a fractional share at a corresponding fraction of the market price. For example, if a stock is currently trading at $100 per share and an investor wants to purchase a fractional share, they could buy 0.25 shares for $25.
This allows investors to diversify their portfolios and invest in various stocks without coming up with large amounts of capital.
One of the main advantages of buying fractional shares is that it allows investors to invest in high-priced stocks that they might not otherwise be able to afford. For example, a stock trading at $1,000 per share may be out of reach for many individual investors. However, by buying a fractional share, an investor can still invest in the stock for a fraction of the cost.
Another advantage of buying fractional shares is that it allows investors to diversify their portfolios more easily. Instead of putting all of their money into one stock, investors can spread their money across multiple stocks by purchasing fractional shares. This can help to reduce risk and increase the chances of success for the overall portfolio. For example, “SoFi Invest charges zero commission fees to sell or buy the fractional shares.”
While there are many advantages to buying fractional shares, there are also some disadvantages. One of the main disadvantages is that fractional shares do not come with voting rights. Instead, full shareholders are entitled to vote on matters such as company management and other important decisions. Still, fractional shareholders do not have that privilege, only entitled to the dividends generated from the shares they own.
Another disadvantage of buying fractional shares is that they may provide a different level of liquidity than full shares. Because fractional shares are a relatively new concept, it may be more difficult to find buyers or sellers for these types of shares, making it difficult to exit a position if necessary.
In conclusion, fractional shares are an increasingly popular way for individual investors to buy high-priced stocks without coming up with the full purchase price. Instead, they provide a way for investors to diversify their portfolios more easily, making it relatively easy to purchase them through commission-free trading platforms. However, fractional shares don’t have the privilege of voting rights and may not be as liquid as full shares.