Fractional shares have been around for a long time, but have taken off recently as more and more people look to build diverse portfolios using smart online and in-app platforms like Lightyear.
Fractional shares democratise access to markets, allowing new investors and those wishing to spread their funds across multiple assets and asset classes options to buy and sell, without needing huge amounts of money upfront. But how do fractional shares work, how can you buy fractional shares, and who are they good for? Join us as we explore.
- What are fractional shares?
- A real-world example: how do fractional shares work?
- Are ETFs available as fractional shares?
- Do fractional shareholders receive dividends?
- How can I buy fractional shares?
- Pros and cons of fractional shares
- Conclusion: Fractional shares and how they work
A fractional share is - simply put - a fraction of a share, less than a whole. That means you could buy a fraction of a higher price share, such as Apple (APPL) or Tesla (TSLA), without needing to stump up the full share amount at once.
Fractional shares can mean paying anything from about 5% to 50% of the whole share price, in return for that fraction of the underlying asset. That can be helpful if you don’t want to invest large amounts in a single asset, and make portfolio diversification easier, even for newer investors. We’ll look at how this works in a real-world example in a moment.
Learn more about fractional shares and how to trade them with Lightyear.
One place you may have heard of fractional shares is in a stock split, such as when Tesla announced a three-for-one stock split in August 20221. At this point it was announced that all existing shareholders would be issued an additional 2 shares for each Tesla share owned, with the overall value of their assets remaining the same. This brings down the cost of individual shares - making them more accessible for investors in the long run, without eroding the value of existing shareholders.
This guide focuses more on fractional shares as traded by platforms such as Lightyear - that is, fractions of shares in individual companies or ETFs which help individual investors to diversify their portfolio and access a broader range of assets without needing huge upfront savings. More on how that works, coming right up.
Let’s look at a real-world example, returning to Tesla shares as we mentioned earlier.
At the time of writing, TSLA trades for around 240 USD (January 2024). If I’ve decided to invest the equivalent of 500 USD a month through 2024, buying a single Tesla share will eat up nearly half my allocated investment for January.
To build a more diversified portfolio right from the get go, I decide to buy a fraction of TSLA instead. I could opt for a 50% share, and pay around 120 USD - leaving me with plenty to place elsewhere, or maybe go for a 10% share for just 24 USD, so I can really spread my bets and start diversifying across assets and asset classes, even in month one.
As you can see, fractional shares really do give investors - large and small - a lot of options, and increase the opportunity for diversification and cost averaging as they invest month on month.
Yes. ETFs can often be traded as fractional shares, allowing investors to buy into whole baskets of assets for a low upfront cost. Not all platforms allow for trading of ETFs as fractional shares - on Lightyear, this feature is coming soon! - so it’s important to double check with your preferred platform.
Up next - another important point: how do dividends work with fractional shares?
If you choose to invest in fractional shares, you could still earn dividends proportional to the value of the share you own. So if you own 50% of a specific share and that company pays a dividend, you’d be in line for a dividend payment of 50% of the per-share amount.
Bear in mind of course, that not all companies pay dividends every year, and there’s no guarantee that previous pay-outs will mean more to come in future.
If you pick an investment platform that offers fractional shares, you’ll be able to invest easily. Simply find the fractional share you want to buy in the normal way, place your market order and wait for it to be fulfilled. The exact process to buy fractional shares may vary a bit according to which platform you pick - but it should be just as simple as buying any other asset.
As an example, check out Lightyear for smart and simple ways to invest from your phone or laptop. Just download the Lightyear app and register your multi-currency account, and then search for the company or ticker you’re interested in investing in. You’ll instantly see all your options - and any cash you have in your account waiting to invest will earn interest, too.
Not sure if fractional shares are for you? Let’s work through some of the key advantages and drawbacks:
Pros of fractional shares Cons of fractional shares ✅ Makes it easier to access high price shares and to diversify your portfolio ❌ Can increase speculation, as the upfront cost is low - research is still crucial before you buy! ✅ Good for cost averaging strategies as you can invest small amounts, regularly, in a range of assets ❌ Fractional shares may not be eligible for ISA inclusion - although that may change according to a recent Treasury/FCA announcement - see point 2 below. ✅ Potential to earn dividends in proportion to the value of the share you own ❌ Some platforms may restrict when and how you can trade fractional shares ✅ Easy to buy and trade online or in-app ✅ Some assets have no execution fees - depending on the provider or platform you pick
Fractional shares open up opportunities for investors to build a smart, diversified portfolio, even when they’re just starting out, or following a cost averaging approach. By buying fractions of individual shares you can put your money to work right away rather than needing to save enough to buy a whole share - handy when investing in high value stocks, or if you’re planning to invest little and often.
Lots of different asset types are available as fractional shares, but not all platforms and brokers offer all the fractional share options that are out there. Compare a few options, including Lightyear, which offers low cost, no hassle investment for eligible UK and EEA customers, right from your phone.
Disclaimer
Capital at risk, returns not guaranteed. Refer to funds’ prospectuses and key information documents before making investment decisions. Both can be accessed on Lightyear’s web and mobile apps and the fund managers’ websites.
