When you buy fractional shares, you’re purchasing a portion, or fraction, of one share of a company or fund. You can receive fractional shares through stock purchases, stock splits, company mergers or dividend reinvestments.
Historically, fractional shares weren’t easy to come by (though mutual funds have long permitted fractional share investing). Most investors received them due to stock splits, corporate mergers or dividend reinvestment plans (DRIPs). Some investment strategies, such as dollar-cost averaging, also left investors holding fractional shares.
But in the last decade, the investment landscape has changed drastically thanks to online brokers, robo-advisors and micro-investing platforms. Nowadays, many brokerages explicitly offer fractional shares for purchase. Some even let you dictate the exact percentage you’d like to own instead of a set dollar amount.
It’s not uncommon to see stock prices rise into the hundreds or even thousands for a single share of equity. But not everyone has such large amounts of money to drop on their portfolio at once – let alone on one share of one company. And many successful investors would argue that putting all your eggs in one basket, instead of diversifying, is not a good idea anyway.
That’s where fractional shares come in handy. With this method of investing, you can buy the amount of stock you can afford, whether that’s $5 or $5,000.
As such, fractional investing is a boon to investors who can’t commit enormous amounts of capital to a single share of stock. Plus, it makes it easier to diversify your portfolio by spreading your funds across more securities.
Fractional shares can also pay out dividends, albeit proportional to the number of shares you own. For instance, if you own ½ of 1 share of a stock that pays dividends of $1 per quarter, you’d only receive 50 cents.
And some brokerages even confer shareholder voting rights to fractional shareowners.
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