Been waiting to buy fractional US shares but still wondering where to start? We've got you covered.
Let's break down fractional shares; as the name indicates, these are portions of an equity stock that are less than one whole share. The cost of fractional shares will naturally be less than that of the corresponding full equity shares, making fractional investing suitable for investors who do not have access to large amounts of capital.
Fractional investing is not allowed or practised in the Indian stock markets. However, it is very popular in the US market today.
Let’s dive into how they are created.
Fractional stocks may be created in stock splits with an odd ratio of shares. For example, in a 5:4 stock split, you will receive 5 shares for every 4 shares you own. So, if you own 26 shares, you will receive 32.5 shares. This half-share is fractional.
As stock splits, mergers and acquisitions with certain ratios may also lead to the formation of fractional shares in the new company. For instance, 6 shares of one company become 4 shares of another company following a merger or an acquisition. This will lead to fractional stocks.
In a DRIP, dividends paid to shareholders are used to purchase shares. So, if you receive dividends worth $100 and each stock worth $40, you will receive 2.5 shares via the DRIP.
You can also buy fractional shares from online brokerage platforms that sell them, like Fidelity, Robinhood and Charles Schwab. Alternatively, fractional shares can be automatically purchased and added to your portfolio with advisors like Betterment.
You don’t need large amounts of capital to invest in fractional shares. You can invest as little as $1 in these shares.
You can invest a predefined sum easily. For example, $1000 can easily be invested in a company, even if its share price is $34.26.
Fractional investing allows everyone to invest, so this could lead to inflated prices. This is why you need to do your due diligence and check a company's validation before investing.
It’s easy to fall into the trap of over-diversification with fractional investing because you can buy the shares of many companies this way. Plan and invest only in select companies to avoid this pitfall.
You may not receive any meaningful dividend from your fractional investments if they are too small. For instance, if a company declares a dividend of $1 per share, and you own 0.75 shares of the company, you only get $0.75 as dividend payouts.
Fractional investing, like all other investment strategies, requires careful planning. With the right strategy, you can diversify your portfolio beyond Indian markets and own top US stocks like Apple, Tesla, Amazon and more.
If that sounds like something you’re interested in, Fi Money offers an easy way to do this. You’ll find the in-app explainers make investing easier. Fi also gives you the benefit of industry-best forex rates and zero brokerage fees when you invest in US Stocks.
Yes, fractional investing has some downsides. Not all stocks may have fractional shares available, so your choices will be limited. Additionally, the liquidity of fractional shares may also be low.
Buying fractional shares can be beneficial in a bullish market. This is particularly true for small-time retail investors who do not have large sums of capital at their disposal.
Opening an overseas trading account is the best way to start fractional investing. You can then buy shares of the companies you wish to own for as little as $1.
