At the time of this post, the stock market has mostly recovered from its historic drop back in March to in some cases, they are at all-time highs. But with the rising number of COVID-19 cases and some areas or states having to roll back reopening, there is a high possibility that another market downturn is on the way.
The idea for retirees or people nearing retirement having their investments making another huge drop right before retirement is very scary, to say the least.
It’s a tough balance between risk and reward when investing in the stock market. You want to grow your account but at the same time, you don’t want to be too risky and possibly lose a lot, or stuck waiting on your portfolio to recover in another drop. But at the same time, you can play it too safe and miss out. And don’t forget about FOMO (Fear of missing out). FOMO can kick in when see stocks or funds moving higher and higher each day and will sometimes make you try more risky moves than you normally would.
Fractional shares might be a consideration if you want to play it a safer and still maximizing your money during these trying times.
So why choose fractional shares and what are they?
A fractional share is also known as a “slice”, maybe compare it to eating a slice of the pie without having to eat the entire thing. If you want to invest in a company but the share price is currently too high for you, then you can just buy a partial share “slice” of it and own some, but not an entire share.
Fractional shares allow you to purchase stocks based on the dollar amount that you want to invest and not the stock price. You can invest in high-priced company stocks at a more affordable price. This will allow you to achieve a more diversified portfolio than you normally could have by investing in a full single share of a more expensive company stock.
An example would be if the company’s stock is selling for $500 a share and you buy $50 or if, then you would own 0.1 (10%) of a share.
You can also buy fractional shares in some exchange-traded funds (ETF) allowing you to own a “slice” of a fund and not just a single company.
If the company you invest in has a dividend, then your fractional shares do pay dividends proportionate to the percentage of the share you own.
If you believe that fractional shares will work in your investing plan, then you might want to check out and consider Charles Schwab, Fidelity Investments, Stash, Acorns, or Robinhood for commission free fractional share trading. There are minimum and maximum limits, so be sure to know those limits before you begin investing and opening your brokerage account.
So, to highlight the advantages of fractional shares:
- You can now buy into expensive companies you couldn’t afford before.
- Start investing with as much or as little money as you choose.
- You still receive dividend payments and you can also DRIP them.
- More diversified portfolio.
The disadvantage of fractional shares would be fewer earnings since you are only getting a portion. Also, check out the regulatory fees and brokerage fees (if any). Some brokerages will charge a flat transaction fee when you buy or sell. If you are buying or selling a lot of fractional shares, then those fees will greatly reduce your earnings.