- Fractional investing lets you buy slices of shares at an equivalent fraction of the price.
- Fractional investing is very popular among younger generations and first-time investors who find traditional investing unapproachable and expensive.
- Fractional share investing can be extremely affordable and lets the average investor buy a stake in companies that may be out of their price range otherwise.
- Fractional share investing is a great way to diversify your portfolio and lower overall investment risk.
What is fractional share investing?
To understand what fractional shares are, it helps to know how stocks work. Stocks are an equity investment that represents part ownership in a corporation and entitles you to part of that corporation’s earnings and assets. So,when an investor buys a share of a company’s stock, they are buying ownership in a publicly-traded company.
This is why stocks are classified as equities, because investors own equity in that company. Stocks are sold in individual units called shares. A fractional share is a fraction of one share of stock. At Public, we call them “slices.”
Why buy fractional shares?
Unfortunately, traditional investing comes with a lot of barriers to entry. Some stocks are really expensive, and the tentative investor may quit before trying. Fractional shares or stock slices work to lower that barrier to entry, by giving any person with any amount of available cash, the opportunity to buy a stake in a company. Public is in the business of making investing more approachable and this includes making fractional share investing readily available to anyone on the platform; no waitlists, no fees.
Who buys fractional shares?
Fractional share investing democratized the market, making it feasible for anyone to invest. But above all, the technique has become popular among younger generations that are interested in getting involved in the market but find traditional investing unapproachable. You are not alone if you feel like investing is full of fancy words, hard-to-grasp concepts, and hefty fees. The stock market is intimidating and putting a lot of your hard-earned money into it can be scary. So why not start small? Fractional share investing allows the first-time investor to get involved in the stock market with no fees and little cash. This is great for someone looking to jump-start their investing journey.
Advantages of buying fractional shares:
Fractional share investing allows you to put even the smallest amount of cash to work in the market. Considering that some popular stocks trade at $1,000 or more per share, this practice allows for the average person to invest in companies that would be out of reach otherwise. For example, you only have $100 to invest, but you want to invest in a company that is trading at $3,000 per share. Using fractional investing, you have the opportunity to buy 3% of this stock. With this technique you are able to buy a stake in the company you want without a heavy price tag. Alternatively, maybe you want to take that $100 and put it all into a company that runs about $60 per share. Traditionally, you would not be able to invest in more than one share because $100 is not enough to buy two shares. With fractional share investing you can put the full $100 into this company and walk away with 1.7 shares. This is attractive for investors who have a set amount of money that they can allocate toward investing. The technique provides more flexibility for the investor on a budget.
Fractional shares are more than just affordable, they are also a great way to diversify your portfolio. “Diversify your portfolio” is a fancy way of saying lower your risk. A lot of investors diversify their portfolios by putting their money into a mix of mutual funds and ETFs (exchange-traded funds). Mutual funds and ETFs are similar in the fact that they are professionally managed collections of assets (i.e. stocks, bonds, and other mutual funds). Investing in a group of assets creates less risk because you aren’t putting all your eggs in one basket. If handled correctly, fractional share investing can recreate this type of diversification, while giving the investor more power to decide what their portfolio looks like; you can not only handpick which companies you want to invest in but also how much you want to invest in each one. For example, maybe you are a big fan of a high-value e-commerce company. You recognize that this may be a riskier investment, but you believe in the future of the business and decide to buy a fraction of a share. To compensate for the potential risk, you may look to buy a slice of a more mature company with a longer, more stable track record. In this way, you can curate your portfolio based on your risk tolerance and personal preferences – all within your custom budget.
Buy what you know (and love)
A lot of people are passionate about the brands they use day in and day out; the more we consume a brand the more comfortable we feel with the product and business model. When people approach the stock market, their first instinct is to invest in something they know and love, but sometimes what we know and love is just too expensive. If your favorite brands or products are highly priced on the stock market, consider buying a slice instead of a whole share. Fractional investing gives you the opportunity to invest in the things you love, for less.
A hands-on approach to learning
As mentioned earlier, the stock market can be intimidating and some people are looking for a low-risk way to get their toes wet. Fractional share investing is the perfect way to get some skin in the game without putting your life savings on the line. Reading about investing online or in school is very theoretical, which is why it often takes participating in it to fully understand it. So if you find the stock market hard to understand and you are scared to dive in, fractional investing may be a great way to enter the game. It is a perfect low-risk, hands-on approach to understanding the world of investing. Start with a few dollars and see the concepts that you’ve read about play out in real life. Remember, investing is integral to increasing your wealth over time. Any investment, no matter how small, is a step in the right direction.
How to trade fractional shares
Some people may worry that only owning a portion of a share will remove some privileges that come with certain stocks such as dividends, or cash and stock payouts. This is not the case. As a fractional share owner of a dividend-paying company, you will still be entitled to the dividend payout. Your payout will simply be proportional to the amount of the share you own. For example, if you have 10% of a share of a company that offers a $2 dividend per share, you will receive a $.20 payout (10% of $2). This also applies to gains and losses on your fractional share. If you sell your fractional share at a higher price than what you bought it at, you will receive equivalent proceeds.
There are some conditions and limitations on trading fractional shares. For more information, check out our Fractional Shares Disclosure.
Public makes fractional share investing fee-free and available for many companies and ETFs. On the platform, you can keep track of your investments and share your interest in certain companies with a community of like-minded people.
Fractional investing has democratized the market and Public makes owning your favorite companies easier than ever before. The investing technique makes diversification affordable and customizable, which is attractive for young or first-time investors. Use fractional share investing to put investment concepts to practice and put your cash to work. Within Public’s social investing app, investors of all levels can participate in conversations around their investments; it doesn’t matter which circles you run in.