Fractional Shares Investing 101 – The Basics

If you've ever wanted to invest in your favorite big-name company stocks but found the share prices too high for your budget, fractional shares may fit your needs. Instead of buying a whole share, fractional shares allow you to invest in smaller portions of a stock, making it easier to start with a limited amount of money.

This approach can make investing more accessible, especially for young adults, beginners and those who want to gift investments. Fractional shares can be one way to take the first step toward long-term investing.

What are fractional shares?

A fractional share is less than one full share of stock. Rather than needing hundreds (or, in some cases, thousands) of dollars to buy a whole share of a company, you can buy a fraction of it.

Buying fractional shares could be helpful if you're interested in investing in companies with high share prices but want to start with a smaller budget. For example, if a share of XYZ stock costs $1,000 and you have $100 to invest, you could purchase 0.1, or 10% of a share.

Fractional shares became more widely available as brokerage platforms and investing apps introduced them to make the stock market more accessible. Now, even with limited funds, you can buy into well-known companies with fractional shares.

These shares aren't limited to individual stocks. Many exchange-traded funds (EFTs) also offer fractional shares. Having the option to buy fractional shares provides a way to diversify across multiple sectors or asset types with a relatively small investment. This flexibility can make fractional shares appealing to a range of investors, from those just starting to others looking to add more variety to their portfolio without overextending their budget. 

How do fractional shares work?

Fractional shares work differently from regular whole shares. Instead of buying a specific number of shares, you decide how much money you want to invest. For example, if you have $500 and want to invest in multiple high-priced stocks, you can purchase fractions of each to align with your budget and start building (or diversifying) your portfolio.

How are fractional shares created?

Fractional shares can be created in several other ways:

• Stock splits: You may want to know if you'll get fractional shares when a stock splits. The answer depends on how many shares you own and the split terms. You may get a fractional share if the split results in a non-whole number.
• Dividend reinvestment plans (DRIPs): If you reinvest dividends instead of receiving them as cash, brokers may issue fractional shares proportional to the dividend amount.
• Mergers or acquisitions: When companies merge or are acquired, shareholders sometimes receive fractional shares as part of the transaction.

How can you buy fractional shares?

Many of the best online brokers that offer fractional ETF shares or stocks (like Fidelity, Schwab and Etrade) let you invest by specifying a dollar amount rather than the number of shares. If your retirement savings account, like a Roth IRA, is with one of these brokers, you may want to investigate if they allow fractional shares on Roth IRAs, as many of them do.

Can you trade fractional shares?

Trading fractional shares involves buying and selling smaller portions of stocks or EFTs instead of whole shares. Unlike whole shares, fractional shares may have some limitations when trading, making them more difficult to sell. Since fractional shares can be created and managed by brokerages, you may only be able to sell them back to the broker that issued them rather than other investors. This could limit your ability to sell quickly or at the desired price.

However, most major platforms have a relatively streamlined process for trading fractional shares, making it more accessible for some investors.

What are fractional ETF shares?

Fractional shares aren't limited to stocks. Fractional ETF shares function similarly to fractional stocks, allowing you to invest in portions of ETF.

Brokerages have made buying fractional shares more accessible to investors, whether you're looking at individual companies or ETFs. It can also help you divide your budget across the best stocks to buy fractional shares, creating a more diversified portfolio over time.

Pros and cons of fractional shares

Fractional shares offer several benefits that may appeal to younger or newer investors and those looking to gift stock ownership. However, while fractional shares provide some flexibility and accessibility, there are limitations to keep in mind. Here's a look at the pros and cons of each.

Pros of fractional shares:

• Accessibility: High-quality stocks can cost hundreds or thousands of dollars per share. Buying fractional shares makes owning a piece of these companies possible without a huge budget. For example, platforms like Etrade fractional shares let you start with as little as a few dollars.
• Diversification: With fractional investing, you can spread your money across multiple companies and sectors, reducing your overall risk. Even if you only have $100 to invest, you could own portions of several big-name companies.
• Precise investing: You can invest the exact amount of money you have without leaving your cash sitting idle in an investment or money market account. That can give you more control over your portfolio.
• Dollar-cost averaging: This investment strategy involves contributing a fixed amount at regular intervals (say $50 or $100 monthly). Regardless of market fluctuations, this approach can help smooth out the cost of buying shares over time.

Cons of fractional shares:

• Limited availability: Not all brokers sell fractional shares, and some only offer them for select stocks and ETFs. Researching the best online brokers that offer fractional ETF shares can help ensure you have access to the investments you want.
• Liquidity and transferability: Selling fractional shares can sometimes be more complicated than selling whole shares. Additionally, transferring fractional shares to another brokerage may not always be an option, so it's important to understand your broker's policies.
• Overtrading: The low upfront costs of buying fractional shares could encourage frequent trading. While this may seem appealing to some, it isn't always an ideal approach for beginners, who may benefit more from focusing on long-term strategies instead of chasing short-term gains.
• Lost dividends: If you own a very small fraction of a share, your broker may keep your dividend. For example: In cases when your fraction of a stock entitles you to less than 1¢ in dividends (0.9¢ for example), you may not receive any dividend, and that portion could be a meaningful percentage of the stock’s value. On a $1 fraction, you would miss out on 1% in value, and with a quarterly dividend, you would miss this four times a year.

Can you buy fractional shares as a gift?

Fractional shares can also be a fun gift for younger family members, especially children or grandchildren who may be interested in a particular brand or product. For instance, if your grandchild loves a certain tech company or sports brand, gifting them a fractional share of that company could introduce them to investing while still making the connection a bit more personal and meaningful to them.

This gift can also be a creative way to teach financial responsibility. Following company news, learning about general market trends, and seeing how stock prices fluctuate help kids and teens understand the basics of long-term investing through their favorite brands. Over time, this could help spark an interest in building their own portfolios and learning how to manage their finances for the future.

Many brokers make gifting fractional shares simple by allowing them to be purchased for custodial accounts, where a parent or grandparent oversees the investment until the child reaches adulthood.

Tips for beginner investors using fractional shares

If you're new to investing, fractional shares can be a flexible and accessible way to start. Whether building your first portfolio or exploring the stock market with a limited budget, fractional shares may help you learn the ropes without the pressure of bigger initial investments.

Here are some tips to consider:

• Start small: You don't need to invest large amounts when you're just starting, especially if you don't have the budget. Fractional shares allow you to dip your toes into the stock market with just a few dollars.
• Avoid overtrading: The low cost of buying fractional shares can make frequent trading tempting, but this strategy can lead to more fees and potentially impulsive decisions. Instead, focus on the long-term approach, allowing your investments time to grow and compound.
• Focus on the long-term: Think about your future financial goals and how fractional shares can play a role in helping you achieve them. Long-term investing is often about steady growth over time versus quick wins.
• Consider dollar-cost averaging: This strategy involves regularly investing a fixed amount, such as $50 or $100 per month, regardless of market conditions. Buying fractional shares makes it easy to apply dollar-cost averaging, helping you grow your portfolio without needing to time the market.
• Leverage tools from your broker: Many brokers offering fractional ETF shares or stocks have educational resources, calculators and automated investing tools. These features can help simplify the process for beginners and help you stay on track with your goals.
• Consider brokers that focus on small investors: Apps like Robinhood and Tastytrade provide new investors myriad options—including fractional shares—for investing smaller amounts.

Fractional shares can be a steppingstone to investing

Buying fractional shares can open up new possibilities for anyone looking to begin investing, even with a limited budget. Fractional shares provide a way to access stocks and ETFs, diversify your portfolio, and start building good financial habits—all without requiring a significant upfront investment.

Whether investing for your future or helping someone else get started, fractional shares may be an accessible first step toward long-term financial growth. Starting small, staying consistent and focusing on the bigger picture, fractional shares can help make investing an achievable goal.