Sometimes when shopping we find exactly what we are looking for, for a little less than we intended to spend, and if we pay in cash we get the change back from the cashier. When you’re shopping IRL you can just pop the change into your pocket and make your way to the food court—but what do you do with that extra bit when you’re buying shares of stock online?
Thanks to new technology, you can use it to buy a little piece of stock called a fractional share.
What is fractional 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.”
Stocks, both whole and in slices, are bought and sold on an exchange, like the New York Stock Exchange or the NASDAQ. The NYSE began in 1792 and is an “auction market” that features non-tech companies. The NASDAQ is a “dealers market” and features mostly tech businesses.
An auction market, like the NYSE, is based on buyers and sellers entering competitive bids at the same time. The price at which a stock is traded indicates the highest price that a buyer is willing to pay and the lowest price a seller is willing to accept.
A dealer’s market, like the NASDAQ, is a market based on multiple dealers posting prices indicating for how much they will buy or sell a specific stock.
One common way to buy and sell stocks trading on either exchange is through a broker like Public. Using a broker, an investor can open up an account at a brokerage house and place stock trades within their portfolio.
Historically, investors who buy stocks through a broker have not been able to buy less than one share of stock. Considering that some popular stocks trade at $1,000 or more per share, this practice excluded many people from the process and meant that only the wealthiest were able to harness the power of long-term investing.
Thanks to fractional shares, or slices, investors can own a piece of their favorite companies without having to purchase entire shares. Now, you can invest with whatever dollar amount you have to invest. For example, if you have just $20 to invest, you could buy 20% of a share of stock that is trading at $100 per share. Should the price of that stock rise and you decide to sell, you would earn a return in fractional equivalent.
Advantages of buying fractional shares
Fractional shares can definitely work to your advantage. If you want to gain exposure to (which is a fancy financial way of saying buy) a stock that is more expensive than what you have budgeted, this is for you.
Another benefit of investing in fractional shares is that it immediately gives you access to the market with your available cash. If you’re working with an investment platform that doesn’t offer fractional share purchases you could be missing out. Let’s say you have $125 to invest and choose to buy a share of stock that costs $100. What happened to the leftover $25? Nothing. When you invest with Public, you can invest all your cash into shares and buy one whole share and one slice equal to 25% of a share.
One of the biggest advantages of buying fractional shares is the ability to diversify your investments more easily. Instead of having your funds held up with one share of a pricey stock, you are able to diversify your investment selection. Diversification can reduce your risk and can help maximize potential returns.
Disadvantages of buying fractional shares
Alas, nothing is perfect. Because you’re trading a smaller bit of stock, you may catch additional fees from some platforms or brokers. Public allows you to invest in fractional shares with no commission fees.*
Fractional shares and dollar-cost averaging
Dollar-cost averaging is an investment strategy that involves investing a static dollar amount in the same funds or stocks at regular intervals over long periods of time. It might seem like a strange idea, but if you have an employer-sponsored 401(k) retirement plan, you’re already using this strategy. When you invest using your 401(k), you invest a portion of your salary (hopefully you’re deducting enough to take full advantage of the company match!) and buy however many shares you’re able to at that time with that amount of money.
Dollar-cost averaging works because by investing a set dollar amount over time to buy however many shares of stock that set amount purchases essentially averages out the purchase price of a stock over time.
For example, if a stock is trading at $100 per share in January, and then continues to rise by 10% each month, it will trade at almost $285 in December. When was the right time to jump in and buy that stock and how would you know? Using dollar-cost averaging, you could have invested $150 each month into purchasing stocks, or fractions thereof, and averaged out your price all of the monthly prices added up and then divided by 12. In this case, $162.
If you’re unable to afford a single stock purchase at $100, fractional share purchases will enable you to enjoy the averaging effects of dollar-cost buying while maximizing your purchase power.
How to invest in fractional shares
Now that you understand how fractional shares investing works, you might want to get in on the game. Not all brokers and platforms offer this method of investing to their users and clients. You can start investing with very little money thanks to platforms that do not require minimums, do not charge commission fees, and provide a means for buying stocks in a fractional capacity—like Public.
With Public, you can follow Themes that categorize stocks into groups that match up with your values and ideals. Themes like Green Power, Women in Charge, Cannabiz, and Self-Driving Cars, and more are available to shop, allowing you to build an investment portfolio that speaks to the person you are and the values you hold. Following the themes that matter the most to you will help you stay up to date on the industries in which you choose to invest.
The bottom line
More than maybe any other financial product, fractional shares democratize investing. They allow you to own the companies you believe in with any amount of money, commission-free. 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.
*See disclosures: Public.com/disclosures