What to Know About Fractional Investing
You know that highly successful company stock you want to invest in but can’t afford? What if you could own that stock—or at least, a fraction of it—and earn dividends on it?
With fractional investing, you can.
Here’s what you should know about fractional investing, alternative investment, and whether it’s the right choice for your portfolio.
What is Fractional Investing?
Let’s say you take a quarter of a pie. That’s a fraction of the pie. Fractional investing works the same way. A fractional share is less than one full share of an equity, and fractional investing deals with these fractional shares.
In the past, investors could only own fractional shares as part of a stock split, dividend reinvestment plan, or similar corporate action which may not result in an even number of distributed shares. Fractional shares are not available for purchase on the stock market with regular stocks, but brokers now make it possible to purchase fractional shares in many of America’s leading companies. These often refer to stocks, but exchange-traded funds (ETFs) can also be purchased fractionally.
If it sounds like a bizarre concept, it’s important to remember that this concept has actually been around for quite a while. If you’ve ever participated in a dividend reinvestment plan, for example, chances are you’ve participated in fractional investing, even if it was unintentional.
How It Works
Typically, fractional shares are the result of stock splits, dividend reinvestment plans, mergers, or a similar corporate move.
Let’s say you participate in a dividend reinvestment plan. In such a plan, dividend-paying companies allow shareholders to use dividend payouts to purchase more of the same shares. But as the amount drips into purchasing, it isn’t limited to whole shares, often due to things like dollar-cost averaging.
Or, maybe you benefited from a 3-to-2 stock split. In other words, you’d now own three shares for every two shares that you own. If an investor had nine shares to begin with, they would come out of the stock split with 13.5 shares.
Here’s the good news: as far as the company is concerned, you own stock, regardless of whether it’s fractional. That means you get all the benefits of an investor with a full share, including the same percentage gains. It would just be smaller based on the percentage—you would only get half the dividend from owning half a stock.
Trading Fractional Shares
Here’s the catch: unlike full stocks, you can’t trade fractional shares on the market.
The only way to trade one away is through a brokerage firm, which will combine it with other fractional shares of the same stock and sell the bundle as one whole stock. Since fractional shares are typically the result of accidental algebra, and since many investors prefer to own whole shares if they can help it, you have to rely on a broker to recombine your fraction for you.
That said, as long as there’s demand for the stock you’re selling, this is more of a technicality than a major downside.
Fractional Investing, Alternative Investors: What’s the Benefit?
For investors (alternative or otherwise) there are several important benefits to fractional investing that may make it worth your money, especially if you have limited funds to begin with.
Strong Stocks Made Affordable
The best thing about fractional shares is that they allow you to purchase shares in a company and build a portfolio that you would not be able to afford otherwise.
For example, let’s say a stock sells at $2,000 per share (not unheard of for top performers). That means you’d have to shell out $2,000 just to see the benefit of owning a single one of those stocks. And if you want to purchase another one, that’s another $2,000.
But if you bought it as a fractional share, say ¼ of the full stock, then it would only cost you $500. Some fractional stocks can be bought for as little as $5 or $50. That way, you can realize the benefits of owning stock in that company, even if it’s just a sliver of the earnings you might get from a full stock.
The second benefit is portfolio diversification.
Unfortunately, because of how some stocks are priced, many investors are priced out of the market or forced to invest elsewhere. The bad news is that some of the most popular, highest-performing stocks are also the most expensive. And if you don’t have tens of thousands of dollars, you’ll have to settle for less expensive (and lower performing) stocks.
But with fractional investing, you can diversify your portfolio to include some of the highest performing stocks in the industry.
How to Buy Fractional Shares
Buying fractional shares is relatively straightforward. You just have to find a broker who works with fractional shares and ask to see options. From there, they can give you a few options that suit your budget and your investment interests. The plus side is that you get an expert opinion in the process.
It is worth noting that because you have to purchase fractional shares from a broker, you may not be able to take your fractional shares with you if you decide to switch your assets to a new broker.
The Strongest Alternative Investing Tools on the Market
Whether it’s fractional investing, alternative investing, or a whole different avenue, there are a lot of options to grow your financial future. And here at Masterworks, we’re on a mission to make sure ordinary investors can access great investment options.
That’s why we make it possible for our members to purchase shares in authenticated multi-million-dollar art. It’s like fractional investing, but for blue-chip art, which has outperformed the S&P 500 by 180% from 2000 to 2018. All you have to do is purchase shares that interest you and collect dividends when we make a sale. Ready to get started? Fill out your membership application today to learn more.