How Does Fractional Investing Work?

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Investing in the stock market can sound a bit intimidating, particularly if you are just getting started.  

But there are multiple ways for you to invest in the stock market - and, better yet, you won’t even have to own the full share of a stock. That’s where fractional investing comes in. 

As the name suggests, fractional investing means acquiring a fraction of a full stock. Like with any other investment, fractional investing comes with its advantages and disadvantages.  

In this article, we will go through the basics of fractional investing and how it works, so you can make an informed decision on whether or not to add fractional shares to your portfolio. 

What is Fractional Investing? 

Fractional investing simply means acquiring the fractional share of a stock, rather than the full share.  

In other words, fractional investing allows you to invest a smaller capital, making it an effective way to diversify your portfolio. 

Just like full shares, fractional shares will also pay dividends. Naturally, these are proportionate to your investments: if you own 0.3 of a stock, then you will be paid 30% of the full share dividends. 

When investing in a full stock, you will be subject to price variations. If you have $200 to invest, then you naturally won’t be able to buy stocks that exceed your capital.  

Fractional investing, on the other hand, will let you buy $200 worth of stocks, rather than stocks worth up to $200. It might sound like a simple wordplay, but the difference is a significant one. 

If a company sells its stock for $200, you will only be able to acquire one full share, and your investment will be restricted to this single stock. On the other hand, when buying fractional shares, you will be able to spread the wealth.

Fractional investing lets you buy fractions of stocks worth $300, $500 or even $1,000 or more. In other words, you can build a more diverse portfolio with the same capital. 

Keep in mind that your returns will be smaller as well. If a company pays $0.60 per share, and you own 0.25 of a share, then you will be paid $0.15 instead.  

Fractional investing is also subject to the usual risks associated with the stock market, such as high volatility. Additional fees are also applicable with most online brokerages when purchasing fractional shares.  

It all comes down to your own investment strategy and risk management profile. 

What are Fractional Shares? 

Fractional shares, as the name suggests, are fractions of a stock. In other words, fractional shares allow you to invest in the stock market without having to own a full share.  

This is a fairly recent development. Buying fractional shares wasn’t really possible, and investors would usually end up with fractional shares as the result of a stock split, of a dividend reinvestment plan (DRIP), of a merger, or of an acquisition.  

We will go into further details about those later on. Nowadays, you can buy fractional shares as a regular investment directly from brokers. 

Fractional shares work essentially the same way as any other regular share. You will still be paid dividends (however, not all companies offer dividends), however, these will be proportional to your fractional share. If you buy a 0.5 share of a stock, then you will be paid half the dividends, and so on. 

Compared to full shares, fractional shares have some advantages, and also some disadvantages.  

 Looking on the positive side, fractional shares allow investors to diversify their stock portfolio, even with a much smaller capital. 

Think of it this way: stocks from major companies can cost as much as $3,000, effectively taking the average investor out of the picture.  

However, by acquiring fractional shares, you would still be able to invest in these major companies with $1, $5, $50 or so on.  

Adversely, fractional shares will naturally offer smaller dividends compared to the full share. And, just like any other regular stock, fractional shares are also subject to the stock market’s high volatility.

In some cases with online brokers, it's possible to start fractional investing via the given broker's mobile app.

Make sure to know the risks involved, and whether or not these investments fit into your strategy and risk profile. 

Examples of Different Fractional Share Structures   

In the stock market, fractional shares can essentially be split into three different groups, depending on how they were originated: stock splits, dividend reinvestment plans (DRIP), and mergers and acquisitions (M&A). 

• Stock splits: When a company decides to do a stock split, it is essentially boosting the number of available shares, while making them cheaper. A 2:1 split would create two shares for each existing one. An investor owning one $90 share would, therefore, end up with two $45 shares instead. But a 3:2 split, on the other hand, would create 1.5 stock instead. In this case, the same investor would end up with a full share, worth $60, and 0.5 of a share, worth $30. 
• Dividend reinvestment plans (DRIP): In a DRIP, the dividends paid out by the company are immediately used to buy new stocks. If you own 50 shares, and the dividends were $0.60 per share, then you would be paid $30. Now, let’s assume that a full share costs $200. In this case, you would buy 0.3 of a full share instead, ending up with 50.3 shares in total. 
• Mergers and acquisitions: When a merger or an acquisition happens, the combined companies must create new shares. In this case, a ratio must be established. If Company A and Company B merge into AB, 4 shares of Company A are worth 3 shares of Company AB. If the investor owns 150 shares of Company A, then that investor would end up with 112.5 shares of Company AB after the merger.   

How Can I Start Fractional Investing? 

As mentioned earlier, fractional shares are rarely available in the stock market. Most of the time, you will only be able to buy full shares instead.  

Due to this, the best way to buy fractional shares is by doing it via a reliable and regulated broker - like Admirals. 

 Let’s use Tesla shares as an example. A Tesla share costs approximately $250. However, you only have $100 to get started with. While you wouldn’t be able to buy a full share in the stock market, you can still invest in Tesla’s stocks with a fractional share. 

At Admirals, you can start investing from $1. With $100 capital, you would still be able to invest in Tesla by acquiring a 0.4 share. Of course, you can also diversify your portfolio even further by investing $25 in Tesla’s shares. You would own 0.1 of a share in this case, keeping the remaining $75 to invest in other companies. 

You can sign up for free, with no hidden costs. Download the Admirals Mobile app for a high-performance, personalized investing experience and start investing today.   

How Does Fractional Investing Work: Conclusion 

Fractional investing can be a good option to diversify your portfolio, however, it is crucial to consider both the pros and cons – for example, potentially higher fees when investing in fractional shares.  

Fractional shares let investors get started with a much smaller capital, while also spreading their investments between multiple companies - something that simply wouldn’t be possible with full shares. 

Just like any other financial investment, fractional investments come with their own risks. First of all, keep in mind that fractional shares are no different from any other regular shares - which means that they would still be subject to the high volatility of the stock market.  

The returns will also be smaller compared to full shares: the dividends from 0.5 of a share will naturally be smaller compared to the dividends from a full share. 

Before considering fractional investing, make sure you understand all the pros and cons. Weigh the risks against the rewards, and whether fractional shares would be a good fit for your own investing strategy. 

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.