Introduction to Fractional Shares: How Fractional Shares Can Build Your Portfolio
 |
| Introduction to Fractional Shares- Thanks to AbsolutVision for this image |
That's where fractional share investing comes to the rescue like a sagely sherpa guide!
Fractional shares essentially break down the barriers to entry - both mental and financial - helping individual investors comfortably get their feet wet in the investing world.
I'll always remember my friend Steve who wanted to buy some Tesla stock but couldn't afford the high per share price tag at the time on his limited income as a teacher.
However once fractional share trading became available on Robinhood and other platforms, he was able to buy 0.25 of a TSLA share just to gain some exposure and participate in the company’s growth story with his modest 50 dollar investment.
It gave him a taste of smart investing instead of having to obsess over scratch lotto tickets!
On a basic level, fractional shares allow investors to purchase portions of a single share of stock instead of having to pay for an entire share.
So if Amazon is trading at 2,300 per share, I could decide to purchase 0.10 of a share for 230 rather than forking over the full 2,300.
This effectively breaks down those barriers and helps me gain exposure to the stocks I want.
The benefits here as a beginner investor are immense
Getting Started with Fractional Share Investing:
Overview of brokerages that offer fractional share trading-
When I first decided to try dipping my toes into fractional share investing, I'll admit I found the brokerage selection process rather daunting.
There are so many options out there like shoes at a DSW store! Ultimately I decided to go with Robinhood because my dad kept raving about how user-friendly it was for investing newbies.
Popular fractional share brokerages include:
Robinhood - This pioneer in commission-free investing made fractional share trading mainstream. Robinhood's simple, easy-to-use interface is perfect for beginner investors learning the ropes. However, customer service complaints remain an issue.
Charles Schwab - With great customer service and resources for beginner investors, Schwab makes it easy to trade fractions of stocks and ETFs online. Minimum fractional stock trade is 5.
Fidelity - A leader in retirement and wealth management services, Fidelity offers fractional share trading on over 2,500 stocks and ETFs with a 1 minimum. Great educational resources available.
Interactive Brokers - Geared towards advanced investors, IB allows trading fractional shares starting at 0.01.
However, their platform and tools can be overwhelming for investing newbies. Minimum account balance requirements also apply.
The bottom line is there are now many reputable brokerages catering to fractional share investing, with differences in pricing, supported securities, account minimums and user experience.
As a beginner investor, I would advise choosing an established, secure brokerage that aligns with your comfort level around account management and trading tools.
Building a Beginner Portfolio with Fractional Shares:
 |
| Building a Beginner Portfolio with Fractional Shares |
As a wise man once told me, putting all your eggs in one basket is about as smart as using a hornet's nest as a piñata. Thanks for the advice Grandpa!
When building my first investment portfolio using fractional share trading, this advice on diversification really guided me.
Asset allocation and diversification:
Diversifying one's portfolio means selecting an array of asset types across various companies, sectors, industries and geographies.
No point in me pouring all my cash into airline stocks before a pandemic struck, grounding the world's planes!
As a beginner investor, I aimed to create a balanced basket with a mix of:
Stocks - High growth companies like Apple and Microsoft; Stable dividend payers like Johnson & Johnson
ETFs - Low cost index and sector funds providing diversification in one trade
Bonds - Government and corporate bonds provide steady income and stability
In addition to asset type diversification, one wants exposure across:
Domestic and international - U.S. U.K as well as foreign stocks and funds
This overall diversification reduces risk while allowing me to participate in returns across various market areas.
Rebalancing over time as portfolio grows :
As certain assets appreciate faster than others, periodic portfolio rebalancing is key to maintain target allocation percentages. I do this annually, selling winners to buy more of declining assets.
Dividend reinvestment:
One smart way to grow my portfolio is letting dividend payments automatically repurchase fractional shares. This compounding effect is magical!
Risks and Drawbacks:
While fractional share investing has democratized access to the stock market, it's not all sunshine and rainbows. As with any investment approach, there are some potential downsides to consider.
Liquidity challenges - harder to sell fractional shares.
One issue with fractional shares is that they can be harder to sell compared to whole shares, especially if you are trying to unload a very small fraction. It's kind of like trying to sell a half-eaten sandwich - not many takers!
Since fractional shares must be aggregated into whole shares before being sold on the open market, you could face delays in order execution and settlement. This relative illiquidity could pose problems if you need to raise cash quickly or rebalance your portfolio.
Imagine the frustration of putting in a sell order for your 0.7 shares of Tesla and watching the price drop 5% before the trade finally goes through!
Could miss out on shareholder benefits reserved for whole shares:
Another potential drawback is that fractional shareholders often don't receive the same benefits and rights as those holding full shares. This is akin to getting a pat on the head instead of a slice of cake at the shareholder party.
For example, many companies offer perks to shareholders like product discounts or exclusive event access. However, these may require owning a minimum number of whole shares, leaving fractional investors out of luck.
Additionally, fractional shareholders typically don't have voting rights on corporate governance issues put forth to investors.
It's taxation without representation all over again!
Despite these risks, I still believe the pros of fractional share investing outweigh the cons for most beginner investors. The ability to get started with very little capital and learn the ropes of the market is invaluable.
Tips for Responsible Investing:
As Uncle Ben famously said to Peter Parker, "With great power comes great responsibility." While he was referring to super powers, the same wisdom applies to investing!
Here are some tips for being a responsible fractional share investor:
Research companies and maintain reasonable return expectations:
I once got swept up in the hype around a hot IPO and invested 50 without doing any research. Let's just say I ended up with a nice lesson in fundamentals analysis and return expectations!
Before buying fractional shares, I now ask questions like:
- What products/services does the company sell and what's the outlook?
- How strong are financial metrics like revenue, profits and cash flow?
- Does management have a good track record?
- Is the stock fairly valued or overhyped?
Setting realistic return assumptions based on risk helps avoid foolish decisions driven by fear of missing out (FOMO). I also make sure to diversify instead of chasing hot tips on message boards.
Understand risks and have long-term discipline:
The market can be more turbulent than Space Mountain at Disney World! Having a stomach for risk and long-term discipline is key to investment success.
Before hitting the buy button, I contemplate:
- How would this position perform in a downturn?
- Am I comfortable holding for 3-5 years despite volatility?
Utilize automatic recurring investments for discipline
By setting up recurring fractional share purchases in my favorite stocks and ETFs, I take emotions out of the equation while steadily building my portfolio. This forced discipline brings peace of mind!
In conclusion, fractional share investing has been a game changer, truly democratizing the stock market for small retail investors like myself.
By allowing us to purchase slices of shares in top companies with little money, fractional trading provides a smooth onramp to long-term wealth creation.
I'll never forget the rush of excitement when I made my first fractional share trade - 0.05 shares of Apple for 6.
It wasn't a huge position, but it represented my first step towards an investing habit. With subsequent regular and diversified fractional share purchases, I've built a balanced portfolio tailored to my risk appetite.
Of course, investing education remains vital to long-term success. While fractional trading makes the mechanics easier, understanding risk management, portfolio construction, taxes and more is still essential.
Thankfully, there are now abundant resources for beginner investors looking to trade fractional shares responsibly.
Overall my journey into fractional share investing has been extremely rewarding, instilling personal finance disciplines that changed my life.
I used to think the stock market was an untouchable, Wall Street realm. But with fractions, this retail investor finally has a seat at the table!
Check our guide on Smart Investing
