Fractional shares: What are they and how do you buy them?
Editorial staff, J.P. Morgan Wealth Management
- A fractional share allows investors to buy a portion of a share of a single stock or exchange-traded fund (ETF), potentially making high-priced investments more accessible.
- Policies on fractional share trading vary between brokerage firms. Not all platforms support fractional shares, and some may restrict voting rights or the transfer of fractional shares between brokerages, so it’s important to confirm how your trading platform handles fractional transactions.
- Fractional shares may make share trading easier. By not purchasing whole shares, fractional share trading lets investors buy based on their budget.
A fractional share is a portion of a whole share of stock or an exchange-traded fund (ETF). Instead of purchasing a full share, investors can buy a fraction of one, making it easier to invest in high-priced stocks or funds with a smaller amount of money.
In essence, fractional share trading gives you the option to invest a specific dollar amount rather than having to figure out how many shares you can afford. You may also end up with fractional shares in certain situations beyond buying them directly, like as the result of a merger, a stock split or if you participate in a dividend reinvestment plan.
Below, we cover the basics of fractional shares, how to trade them, and the pros and cons of holding them in your investment portfolio.
How do fractional shares work?
Fractional share trading allows investors to buy a specific dollar amount of a stock rather than a set number of shares. This approach may provide access to more expensive stocks and ETFs, making investing more flexible and accessible.
Policies on fractional shares vary between brokerage firms, so it’s important to check how your platform handles fractional trades. It’s also important to check whether holding specific fractional shares will provide you with voting rights.
Why do fractional shares exist?
Beyond the ease of use when it comes to investing with a set budget or purchasing a more affordable portion of a higher-priced stock, other circumstances might leave you with fractional shares in your portfolio.
Fractional shares are often the result of the following:
- Stock splits: When a company splits its stock, investors may receive partial shares.
- Mergers and acquisitions: Fractional shares may occur when companies merge, depending on how shares are distributed.
- Dividend reinvestment plans (DRIPs): Investors who reinvest dividends may accumulate fractional shares over time.
Get up to $1,000
When you open a J.P. Morgan Self-Directed Investing account, you get a trading experience that puts you in control and up to $1,000 in cash bonus.
Trading fractional shares
Some brokerage platforms allow you to buy and sell fractional shares following the same process you would use to trade whole shares.
Let’s say you’re interested in owning a stake in “ABC Corp.,” which is trading at $1,000 per share, but you only have $500 to invest. Fractional trading lets you purchase half a share by doing the following:
- If your brokerage account allows it, you can enter a buy market order for any dollar value you wish to invest to purchase fractional shares.
- The trade ticket will then calculate the amount the dollar value equals in whole and fractions of shares of the “ABC Corp.” stock.
Trading fractional shares may vary depending on the policies of your broker. On some platforms, you can buy and sell fractional shares in real-time. Other brokerages aggregate their customers’ fractional orders – meaning they log fractional trades throughout the day and then execute a larger transaction at the market’s close to settle them. This process can affect the overall price you pay or collect when you buy or sell fractional shares.
Since policies and procedures can vary, it’s a good idea to check if your brokerage offers fractional shares and then to assess how they handle them. Even if your brokerage does offer fractional shares, you may find that fractional transactions are limited to certain customers or only offered under specific conditions.
Pros and cons of fractional shares
Like any investment strategy, trading fractional shares presents its own set of advantages and disadvantages.
Pros
In addition to making it easier to invest in higher-priced stocks, fractional shares also potentially offer the following benefits:
- Lower minimum investment requirements: In the past, the higher price of a single-share of stock could serve as a barrier to investment for many. Fractional shares allow investors to invest in a wider range of stocks with a smaller initial investment.
- Automatic reinvestment of dividends: Many brokers will offer dividend reinvestment plans (DRIPs) that automatically purchase fractional shares with your earned dividends, compounding your returns over time.
- Better use of available funds: Instead of leaving small balances in your brokerage account unused, fractional investing lets you put every dollar to work, maximizing your investment potential.
Cons
While fractional shares may expand your investment possibilities, there are some potential downsides to be aware of:
- Limited or no voting rights: As a shareholder, you’re entitled to vote in elections for members of a company’s board of directors or on other key corporate decisions, but you may not have a say if you own a fraction of a share. Some brokerages have special procedures allowing fractional shareholders to vote, while other firms don’t permit this at all. Ensuring you know your broker’s policies is key to maintaining a successful portfolio with fractional shares.
- Buying and selling shares: While whole shares can be bought and sold instantly, the trading of fractional shares may take longer to execute. If you choose to move your assets to another brokerage firm, you may have to sell the fractional shares in your existing account, as you might not have the option to transfer them. It’s important to understand your broker’s policies around the buying and selling of fractional shares.
Are fractional shares a good idea?
As with any investment decision, determining whether fractional shares are right for you depends on your personal situation, goals and risk tolerance. Fractional shares let you access stocks you may not be able to afford otherwise, helping you diversify your portfolio, but keep in mind they may also be more difficult to sell or transfer.
If you’re looking for exposure to pricey stocks but have a limited amount to invest, fractional shares can be a great way to start building a position. They are also advantageous in that they allow you to invest according to your exact budget, not based on stock share prices.
However, if you’re concerned about voting rights or having shareholder rights, you might want to be more cautious about including fractional shares in your portfolio. Whether you decide to invest in fractional shares or not, the assets you select should ideally make up to a diversified portfolio tailored to your specific needs.
The bottom line
Fractional shares provide a flexible way to invest in stocks and ETFs without needing significant capital. They allow for easier diversification, dollar-cost averaging and portfolio rebalancing. However, it’s essential to consider potential limitations, such as restricted voting rights, transferability issues and varying brokerage policies on the execution and timing of fractional share trading.
If you’re looking for a way to start investing with a smaller budget, gain exposure to investing in leading companies or looking to maximize every dollar in your portfolio, fractional shares may be a smart investment strategy.
Are you ready to take control of your financial future? Learn more about opening a J.P. Morgan Self-Directed Investing account to start building a portfolio on your terms and at your pace.
FAQ
Yes, if a company pays dividends, you’re entitled to receive them based on the portion of the share you own. For example, if you own half of a share and the company pays a $2 dividend per share, you would receive $1. Some brokerages automatically reinvest these dividends into additional fractional shares, while others deposit the cash into your account. Be sure to check your brokerage’s dividend policy for fractional shareholders.
You may be able to buy fractional shares on your brokerage platform using the same process as you would to buy full shares. However, policies vary between brokerage platforms, so it’s important to confirm whether your account allows fractional share trades, whether there are any restrictions involved and how your brokerage firm handles these transactions.
Fractional shares can typically be sold through the same brokerage platforms that allow you to purchase them. Some brokerages may have specific rules around the selling of fractional shares to be aware of, though. For example, some may only allow you to sell your entire fractional share position rather than a portion of your fractional share position in a company.
Invest your way
Not working with us yet? Find a J.P. Morgan Advisor or explore ways to invest online.
Editorial staff, J.P. Morgan Wealth Management
