Invest a fractional amount in that stock you want
Photo by Gabriel Crismariu on Unsplash
A fractional share is a part of one whole share. Fractional shares may occur due to stock splits or dividend reinvestment plans (DRIPs). Today, fractional shares typically occur because you can readily purchase fractional shares through online brokerages such as Robinhood, M1 Finance, and Fidelity.
An example of fractional shares is buying 0.50 shares worth of Apple, which would equate to $60.48 of Apple as of market close on September 4th since Apple’s price was $120.96.
Fractional shares are not readily available on the market, which makes it difficult to sell. That is why it is typically recommended to only purchase fractional shares of stocks you will hold on to the long-term.
With fractional shares, there are 2 key things that make them simple and attractive. The first is that with fractional shares, dollar cost averaging becomes simpler. The second is that you get to buy into companies you could not otherwise afford.
1. Simplifying Dollar Cost Averaging
Dollar cost averaging is an investment strategy in which an investor invests a set amount of money periodically into the stock market. For example, an investor investing $500 every month into the Vanguard S&P 500 ETF (VOO).
Fractional shares further simplify dollar cost averaging because, through an online broker that offers it, you can choose to invest in a security by dollar amount. That means that 100% of the amount you want to invest will be invested.
For example, if an investor is to buy $500 worth of VOO as of its September 4th market close price of $314.82, the investor will have 100% of their money invested and will receive approximately 1.59 shares.
2. Buying into Companies You Could Not Otherwise Afford
With fractional shares, you can invest in that company you want to invest in with an expensive stock. For example, as of the market close on September 4th, Amazon was $3,294.62, and Alphabet’s Class A was $1,581.21.
With fractional shares, you do not need to shell out over a thousand or a few thousands of dollars at once to own a share of an expensive stock. If you employ a dollar cost averaging formula into expensive stocks you want to invest in, you will eventually own whole shares of that company.
Fractional shares further simplify investing for anyone. You can start investing with as little as $10. Fractional shares also make it so you do not need to wait and hope for a stock split to invest in that company you believe is a great investment opportunity. Fractional shares are not for everyone, and some do not like it at all. In becoming understanding of how fractional shares work, you are further improving your investment knowledge.
Check out The Tunji Letter to stay connected.