Have you dreamed of owning Amazon stock?
Despite its recent selloff on the New York Stock Exchange, Amazon shares are still trading at around $2,400, so a buying opportunity can remain challenging to achieve.
But have you thought about employing fractional share trading?
In recent years, fractional share investing has become all the rage, especially for newcomers in the trading scene who want to get in on some of the hottest stocks on the market, from Amazon to Tesla Motors.
This investment endeavor consists of owning less than a single share of a company. Your ownership of the stock is based on the dollar amount you wish to invest, starting from as little as a buck. Read on to learn more.
How Do Fractional Shares Work?
Not everyone can afford to buy 100 shares of JPMorgan Chase or McDonald's, setting you back a few thousand dollars.
However, fractional share trading allows you to partake in diversification at a low cost since you need very little capital to get started.
Let's say you want to purchase shares in Microsoft Corporation, which is trading at just under $300. This can be a lot of money to gather for many individuals. What you could do instead is acquire, for example, one-third of a share in Microsoft, costing you around $100.
This way, you can build a wider pool of investments on your budget while also investing in companies you believe in. Sure, it might not work when you are planning a comfortable retirement, but it serves a purpose when starting out.
The other common method of utilizing fractional share trading to your advantage is a stock split. This is when the company increases the number of outstanding shares by issuing more to its investors.
Pros of Investing in Fractional Shares
No Barriers
The first key advantage is that you can begin your trading with very little capital, meaning there is no barrier to entry. Be it $1 or $10, you can invest in Walmart or Exxon Mobil.
Alleviate Your FOMO
If you could not take advantage of the sharp decline in stocks at the beginning of the coronavirus pandemic, you need not worry as fractional share investing still helps you expose your portfolio to the best of the best, whether it is Alphabet or Facebook, and engage in greater asset allocation.
Dollar-Cost Averaging
It might not seem like it, but $10, $20, or $30 a week in buying stocks can go a long way in the future. Why? Dollar-cost averaging, or DCA. This is when you buy positions in a company regularly at any price to avoid volatility and take advantage of the dips. If you're buying $10 in Netflix every two weeks, you can eventually carve out a terrific position in the business.
Diversification
Berkshire Hathaway (Class B), Target, Domino's, and Nutrien are costly stocks, but they would be great securities for building a well-balanced portfolio. So, you may not have the funds to buy at least one share in all these firms, but you can begin constructing a diversified portfolio by acquiring $10 worth of positions in each of these stocks.
While you are still prone to risk and losses even when you invest in increments, buying stocks and other types of investments is instrumental to finances.
Cons of Investing in Fractional Shares
No Planning
Oftentimes, when you are looking to start trading, you can get excited, thinking of turning $1 into $1,000 overnight. The chief problem with fractional share investing is that neophyte traders will buy a whole host of companies without a plan, treating it as an all-you-can-eat buffet. This is reckless and can impact your money in a negative way.
Risk of Bad Stock Investments
In the last couple of years, market analysts have realized that fractional shares, especially for large-cap stocks, can inflate prices because of the influx of retail investors. So, without due diligence and monitoring market trends, the inflated price could manipulate novice traders.
Lack of Dividends
In the end, since you do not own a full share in a company, the dividends component becomes tricky. In many cases, because you do not have one share in your possession, you might not receive a dividend. In fact, your broker may get that monthly or quarterly dividend.
How to Invest in Fractional Shares
Many brokerage account services offer their clients access to fractional shares, such as AvaTrade, TD Ameritrade, Robinhood, and other popular platforms on our list of the best stock brokers. All you need is a client account and to deposit funds, and you can get started.
Just remember a few things:
- Have a plan, do not trade aimlessly
- Use fractional shares as a learning opportunity
- Stick to only a handful of securities
- Never chase stocks that are exploding
Are Fractional Shares Worth Your Investment?
Overall, investing in fractional shares is worth it when you have limited funds and you are still learning about how the stock market works, such as day trading, shorting, or index investing—but it might not necessarily be an efficient strategy when you are investing for your pension or deciding on suitable investment options as a senior citizen.
Anyone can get in on the stock market nowadays, be it a 19-year-old college student or a 31-year-old who just landed a full-time possession—having skin in the game is far superior to demo trading since the latter can often be treated like a video game and you go scorched-earth on the entire equities arena.
It is true that there are some drawbacks of fractional shares versus whole shares, but it is generally safe to agree that fractional shares are worth consideration.
Need more help? Take a look at our investing principles to follow as a beginner