With the price so high for some stocks, how can the average person ever hope to invest? Enter fractional shares: Instead of purchasing a stock at its full price, it’s possible to purchase a fraction of one share of a stock.
This raises the questions: How can you buy partial shares of a stock, how do fractional shares work, and are fractional shares worth it?
To understand all of the above, it helps to take a closer look at how the shares of a company’s stock are structured and the similarities and differences of fractional shares compared with ordinary stocks.
What Is a Fractional Share?
Fractional shares of a stock are also known as fractional equity shares or partial shares of a stock. Typically, investors can buy fractional shares based on a dollar amount, rather than the current trading price of one share.
For example: Let’s say Stock A is trading at $250 per share. You like this company and want to buy their stock, but you only have $50. With fractional share investing, it’s possible to buy $50 or ⅕ of Stock A.
While fractional shares are similar to whole shares, they don’t trade on the open market as a standalone product. Rather, fractional shares must be sold through a major brokerage.
A Quick Overview of Stocks
To understand how fractional shares work and how this investment option emerged, it helps to know how buying stocks works.
What Is a Share of Stock?
When an investor buys a share of a company’s stock, they are buying ownership in that publicly-traded company. This is why stocks are also called equities, because investors own equity in that company.
Stocks are sold in parcels called “shares,” and owners are often referred to as shareholders. Therefore, a fractional share is some fraction — or portion — of one share of a stock.
Bear in mind though, the value of the company is not necessarily represented by a stock’s price per share. Instead, the value of one share of stock is a byproduct of how many shares that the company has made available for public purchase — called shares outstanding.
To find the size of a company as valued by the market, also known as the company’s market capitalization or market cap, multiply the shares outstanding by the per-share stock price.
For example, just because Company A has a per-share stock price of $100, it is not necessarily a bigger (or better) company than Company B which sells for $10.
If Company A has 10,000 shares outstanding and Company B has 1,000,000 shares outstanding, their market capitalizations are $1,000,000 and $10,000,000, respectively. Company B is in fact about 10 times the size of Company A.
How to Buy Shares of Stock
Stocks are bought and sold on an exchange, like the New York Stock Exchange or the NASDAQ. One common way to buy and sell stocks trading on an open exchange is through brokerage accounts. An investor can open up an account at a brokerage house and place stock trades within their portfolio.
Typically, there is a trading commission involved in buying and selling stock shares.
Historically, investors buying stocks through brokerage firms have been unable to buy less than one share of stock. This has made it difficult for some investors to buy stocks out of their price ranges. That’s where fractional shares can make higher-priced stocks more accessible.
After all, in a digital age, there is no reason why investors have to stick with the traditional method of buying stocks by the share. It’s now possible to buy fractions of a share — which isn’t that different from what a share of stock is anyway. A share of stock is a fractional ownership in that company. Buying fractions of that share is just a smaller share.
💡 Recommended: Here’s our step-by-step guide to buying stocks.
Can You Buy Half a Stock?
The simple answer is yes, you can buy half a stock if you’re using fractional shares to invest. With fractional shares, it’s possible to buy stock without having to purchase the entire share. Instead, you use whatever dollar amount you have available to build a portfolio.
For example, a beginning investor might have $500 to purchase shares of stock. But the stock they want to buy is trading at $1,000 per share, putting it out of reach. Thanks to fractional shares, they could still invest the $500 by purchasing 0.5 of a single share.
Then, once they have another $500 to invest, they could purchase another half share, which would allow them to own one full share altogether. Or they could use that money to buy another type of stock. There’s no rule requiring you to own full shares.
Fractional shares allow investors to purchase stocks in increments that fit their financial situation. So for instance, it’s possible to buy half of a stock but you could also use fractional investing to purchase one-quarter or one-third of a stock. This type of strategy is also known as dollar-based investing, since it’s based on the amount of money someone has to invest, rather than an investment’s purchase price.
💡 Recommended: Are Fractional Shares Worth Buying?
How Do Fractional Shares Work?
In brief, investors can buy fractional shares of a stock through a brokerage account, and reap the same returns and dividends, proportional to the amount of stock they own.
Returns From Fractional Shares
It’s worth repeating: The returns from fractional shares — whether gains or losses — are proportional to the fraction you own. If you own 0.33 of a stock, you would see a third of the gains (or a third of the losses), and a third the dividends, if it’s a dividend-paying stock.
You don’t have to wait until you own a full share to “qualify” for those stock returns. You see the same gains or losses as soon as you buy the fractional share.
Too expensive? Not your favorite stocks.
Own part of a stock with fractional share investing.
Invest with as little as $5.
Advantages of Buying Fractional Shares
Investing money this way can offer some benefits, but are fractional shares worth it? They can be, if they help to further your overall investment strategy and goals.
The primary advantage of buying a fractional share is that investors are able to buy part of a stock that may otherwise be too expensive. In this way, fractional shares dismantle a large barrier to entry for those who want to invest.
Fractional share investing can also give young or new investors access to stock markets so that they can learn about them and investing firsthand.
For some, this hands-on approach to learning may be a more effective form of education than thinking about investment ideas or concepts in theory.
With fractional share investing the investor controls precisely how much money they want to spend on a stock. Fractional shares allow an investor to build their portfolio even if they don’t have a significant amount to invest.
This could allow investors to participate in the stock market for a longer period of time, without having to time the market.
Additionally, it can help investors buy the stocks that they actually want to hold in their portfolios, not just the ones that they can afford.
Because an investor can buy a variety of stocks using the money they have available, it may be easier to help in building a more diversified portfolio. Diversification, the idea that investors can mitigate some risk in their portfolios, is generally achieved by buying a variety of investments.
With more control over how much of each stock they can buy, investors could potentially construct a portfolio that is diversified to their liking.
Disadvantages of Buying Fractional Shares
Here are some of the potential downsides and risks from trading fractional shares.
Hard to Find
While investors can buy fractional shares, unfortunately traditional brokerage firms might not offer them for sale. Some brokerages may also place restrictions on selling fractional shares, since they have to be joined with other fractional shares to create a whole share in order to be sold.
Then, those same institutions may charge a flat transaction fee to buy or sell a stock, no matter how few shares the investor plans to trade. Whether buying whole or fractional shares, trading fees and account fees can have an erosive effect on an investor’s returns.
That means that an investor would pay the trading commission whether they were buying a quarter of one share or 500 shares of a stock.
A fee of a few dollars to purchase a whole or fractional share may not seem like a lot, but it can be to an investor without much capital to get started. This is especially true if the investor is interested in building out a diversified portfolio, since buying fractional shares of 10 stocks could mean paying the fee 10 times.
How Different Institutions May Handle Fractional Shares
Each brokerage firm has a different strategy for handling partial shares, so it’s important to pay attention to the terms. For example, if you’re transferring your assets from one firm to another, and the new brokerage doesn’t accept fractional shares, you might have to sell your fractional shares — and incur certain expenses or capital gains taxes.
While some brokerage firms don’t allow the purchase of fractional shares, they may still end up in customer accounts for the following reasons:
• Sometimes, brokerage firms have policies in place to pay out cash when a customer acquires a fractional share through a stock split.
• Other brokerage firms may charge a higher transaction fee to sell partial shares received from dividend reinvestment, and may only allow shareholders to sell partial shares if they sell all their shares of that particular stock.
Pros and Cons of Fractional Shares
|Lowers the barrier to entering the stock market for some investors.||Fractional shares aren’t offered by all types of brokerages.|
|Gives investors more control over the amount of stock they want to own.||Some brokerages may charge fees that can add up.|
|Can help increase diversification.||Fractional share policies vary widely from brokerage to brokerage; investors should know the terms.|
Where Do Fractional Shares Come From?
To buy fractional shares, it helps to understand how and why they exist. Sometimes a fractional share is the result of a stock split, company merger or acquisition, or dividend reinvestment plan (called a DRIP).
In order to lower its price per share, a company may initiate what is called a “stock split.” A stock split may not always result in an even number of shares.
For example, in a 3-for-2 stock split, a company provides a third share for every two owned by an investor. If the investor initially holds 125 shares, they will own 187.5 shares after the stock split.
The investor still owns the same amount of stock in dollars, because the value of those shares will simultaneously drop by one-third. Sometimes, the company will just transfer cash to you in exchange for any fractional shares remaining.
Company Merger & Acquisition
A company merger or acquisition may also result in the creation of fractional shares. When one company acquires another, they may offer their shareholders the option for a stock merger (as opposed to cash merger).
With a stock merger, investors will receive a “conversion ratio,” which is the ratio that converts the shares of the company being acquired. This can result in fractional shares.
Do Fractional Shares Pay Dividends?
Some, though not all, stocks pay dividends to investors. These dividends, which can be paid monthly, quarterly or annually, represent a percentage of the company’s profits that are then paid out to shareholders.
If you purchase shares of dividend-paying stocks fractionally, then you can receive dividend payouts from those stocks just the same as you would if you purchased full shares. The dividend payout you receive would be proportionate to your ownership stake in the stock. So, say you own a half a share of a stock that pays out a $4 dividend per share to its investors. You’d be able to collect half of that dividend payment or $2.
Dividend Reinvestment Plans or DRIPs can also produce fractional shares. Companies can offer DRIPs to investors as a way to reinvest in that company’s dividend-paying stock. When a stock pays out a cash dividend to its shareholders, the DRIP reinvests the money back into the stock automatically, even if the amount of the dividend isn’t enough to purchase an entire share.
DRIPs are a popular option because they don’t often have trading commissions or other brokerage fees.
Cash in Lieu of Fractional Shares
It’s possible that you may be offered cash in place of (in lieu of) fractional shares in certain situations. Instead of crediting you with additional fractional shares, the company you’ve invested with would sell those shares. They’d then send you a check representing the amount of cash resulting from the sale.
A cash-in-lieu situation can happen when a company undergoes a major transition, such as a merger or acquisition. They can also occur when there’s a stock split. It can be easier for companies to simply sell fractional shares and pay investors cash for them, versus creating new fractional shares.
If you receive cash in lieu of fractional shares, you should also receive a Form 1099-B from the company showing how much was paid to you. You’d need to include this form when filing your taxes since the IRS requires investors to account for these payments.
Are ETF Fractional Shares Available for Purchase?
Yes, some brokers do offer fractional shares of exchange-traded funds, or ETFs. Given that ETFs are a low-cost way to buy into different market sectors, owning fractional ETF shares could offer another way to add diversification to your portfolio.
Where to Buy Fractional Shares
If you’re interested in purchasing fractional shares, you have a few options for doing so, starting with DRIPs. The problem, however, is that while some companies may offer DRIPs to new investors, it’s more common for this purchase option to be offered to existing shareholders only. If a company does offer a DRIP to new investors, the purchase typically has to be done through a third-party administrator.
Another option is to buy fractional shares using a mutual fund. Though a mutual fund is not a stock, it is a fund that holds many stocks. Some mutual funds effectively allow for the purchase of fractional shares, because some brokerage firms allow investors to purchase mutual funds using dollar amounts.
So, even if a mutual fund is trading for $79 per share, you could buy $1,000 worth of that fund, and effectively own 12 full shares plus 0.65 of that fund.
An investor could get started buying a fractional share of a mutual fund, and achieving diversification through owning the many stocks that are held in one fund.
Fractional Share Investing With SoFi
Because investors can now buy fractional shares at a fraction of the cost of full shares, doing so can help investors build a portfolio made of select stocks they wish to own, without being deterred by the share price.
That said, not all brokerages offer fractional shares. And because there are various ways brokerages might handle fractional shares that result from a stock split or a dividend reinvestment plan (DRIP), it’s important for investors to know the terms — and the inevitable costs.
If you’re eager to buy fractional shares — because it opens the door to owning some of your favorite companies — consider getting started with SoFi. You can open a self-directed brokerage account with SoFi Invest, and buy fractional shares at no additional cost.
SoFi’s secure platform that lets investors choose from an array of stocks, ETFs or fractional shares — as well as IPO shares, crypto, and more. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account with $10 or more.
Are there downsides to fractional shares?
Yes. Not all brokerages offer fractional shares, and new investors will want to consider all terms and fees for fractional shares at different firms.
Can you make money with fractional shares?
Yes. You reap the same returns with fractional shares that you do with full shares, proportional to the fraction you own. So if a stock has a 5% gain or loss, your fractional share would also gain (or lose) 5%.
When is it smart to invest in fractional shares?
If you want a lower cost way to own specific companies, or to build more diversification in your portfolio, you may want to consider investing in fractional shares.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A., or SoFi Lending Corp.
Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.