What Are Fractional Shares? - Experian (2024)

How Do Fractional Shares Work?

A fractional share is a slice either of a company's stock or of an ETF—a collection of securities, similar to a mutual fund, that trades throughout the day as if it were a stock. Buying fractional shares is also known as dollar-based investing.

Let's say you have $75 to invest and you'd like to buy Apple stock, which traded at $189 per share in mid-May 2024. You can purchase about four-tenths of a share of Apple stock with the money you have.

Once you own a piece of a stock, you'll see both gains and losses just as you would if you owned a full share. But in terms of real dollars, the impact is less. If Apple stock jumps 10%, for instance, someone who owns a full share will see their position grow to $207.90, a jump of $18.90. If you only have $75 worth of the stock, you'll still get a 10% return, but the dollar value will be $7.50, bumping your position to $82.50.

In addition to purchasing a piece of a stock or ETF, you may also get fractional shares if you participate in a dividend reinvestment plan through your brokerage. These plans, called DRIPs, automatically reinvest dividends you earn on your stocks and buy whole or fractional shares of that same stock for you, instead of returning the dividends to you in cash.

What Are the Benefits of Fractional Shares?

Investing with fractional shares has benefits for both seasoned and new investors. Here are the top advantages:

Greater Access to Well-Known Stocks and Pricey ETFs

If you've always wanted to invest in a certain company but couldn't afford the stock price, buying fractional shares lets you have the investor experience at a lower cost. Buying fractional shares of an ETF gives you the opportunity to diversify your portfolio with a broad-based ETF without having to pay for a full share if that's beyond your means.

Budget-Oriented Investing

Dollar-based investing means you don't have to figure out how many shares of a stock or ETF—taking into account any associated fees—fit in your available budget. Instead, you can determine the ideal amount you'd like to invest and get just the right amount of the stock or ETF in return. This can help prevent you from stretching your budget to own a full share of a pricey stock.

More Precise Trades

You can put the total amount you've got to invest toward the stock or ETF you're interested in rather than getting only full shares at the current price. For example, with $5,000 to spend on an ETF that's trading at $85 per share, you'd be able to purchase 58 whole shares for $4,930. But buying fractional shares gives you the option to spend the full $5,000 on 58.8 shares, letting you take advantage of more potential growth (and, of course, take on more risk too).

Easier Dollar Cost Averaging

Dollar cost averaging is an investment strategy in which you invest the same dollar amount at regular intervals no matter how a stock or fund is performing. Because fractional shares are based on dollar amounts, they fit well in this approach, which helps limit risk by ensuring you stay invested whether the market is up or down.

What Are the Downsides of Fractional Shares?

Like any investment vehicle, fractional shares come with drawbacks. They include:

Potential for High Risk Exposure

When you invest in individual stocks, it may be tempting to buy and sell based on the stock's current performance. But riding out market volatility by passively investing over the long term historically provides solid gains without as much risk of heavy losses, especially for inexperienced investors. Investing in mutual funds and ETFs—and fractional shares of ETFs, if that's more affordable for you—can help mitigate that risk.

High Fees Relative to Your Portfolio's Value

Some brokers charge commissions every time you trade, no matter whether you're buying or selling a whole share or a fractional share. If you're choosing fractional shares because you're a new investor or don't have a large portfolio yet, those fees could add up quickly and account for a large share of your portfolio's value. Look for brokerage accounts that don't charge fees on trades.

Do Fractional Shares Pay Dividends?

Like whole shares, fractional shares pay dividends to investors. You will receive dividends based on the amount of stock you own. If your fractional share is equivalent to 5% of a full share, for example, your dividend will be 5% of the amount an owner of one full share would receive.

Can I Buy Fractional Shares of ETFs?

You can buy fractional shares of ETFs. Unlike stocks, ETFs are a collection of securities such as stocks, bonds or currencies, similar to a mutual fund. A fractional share of an ETF gives you access to the diversification ETFs provide at a lower cost.

How to Buy Fractional Shares

To get started with fractional shares, follow these steps.

1. Open a Brokerage Account

Find a brokerage that offers fractional share or dollar-based trading. Brokers such as Charles Schwab, Robinhood, SoFi and more offer access to fractional shares. (Currently, Charles Schwab's program only provides fractional shares of stocks at companies.) After opening the brokerage account, transfer money to it from a connected bank account.

2. Check Fees and Account Minimums

While researching potential brokerage accounts, understand whether they charge commissions or fees on trades and whether there's a minimum order for fractional trades. SoFi, for example, requires a $5 minimum order, while Robinhood and Fidelity both have a minimum order of $1. Check how many stocks and ETFs you can buy fractional shares in on the platform you've chosen.

3. Place an Order

Once you've identified a fractional share you'd like to buy, the brokerage may provide the option to buy in dollars or in shares. If you buy in dollars, you'll pick the dollar amount you'd like to spend and the brokerage will calculate the fractional share you receive. If you buy in shares, you'll choose the share amount to buy, such as 0.0001 shares, based on your budget and the stock or ETF's current share price. Trades typically only take place during regular trading hours; double-check your brokerage's policies.

Frequently Asked Questions

• You can buy fractional shares at brokerages that support fractional share trading. They include Charles Schwab, Fidelity, M1 Finance, Robinhood, SoFi, Stash and more.

• Confirm with your broker how fractional shares will be treated in a stock split. In a stock split, a company increases its number of available shares, which makes the share price decrease. In a reverse stock split, the number of shares decreases and the value increases.

  Your broker may treat your fractional shares as it would whole shares in these cases, simply changing the number of shares you hold. The overall value of your shares won't change. Your broker may also return fractions of stock to you in cash that result from a reverse stock split.

• Fractional shares do not eventually become whole shares. You can own enough fractional shares individually to equal a whole share, if you choose.

The Bottom Line

Fractional shares can lower the barrier to entry for investors. But they may also make it possible to engage in risky trading behavior—investing only in well-known individual stocks, rather than building a diversified portfolio—especially among new investors who don't yet have a settled investment strategy.

It's crucial to take time to learn about the risks that come with investing, especially when choosing to invest in individual stocks. Most important, make sure your choices align with your personal short- and long-term goals.