Published on August 26th, 2021 | by Sunit Nandi0
Things to Know Before You Buy Fractional Shares
Have you ever wondered how expensive a big companies stock would cost? If so, yes, they may be pricey. Moreover, if you have had an eye on pricey stocks lately but can’t seem to invest all of your savings in a single company, fractional shares are your answer. It is an affordable way to get to where you want to go. You might want to go international with investing, and yes, dollars against the rupee, along with a pricey stock, just shoots the prices up even more.
Image Source: The Motley Fool
What is a Fractional Share?
Let us make it simple and easy for you…
A fractional share is a share that allows an investor to purchase a stock based on a dollar amount they select over the price of a whole share. It may be particularly an advantage for investors that are working with limited capital but still want to build a highly diversified portfolio. It is more like an opportunity for an investor to invest in US stocks from India and not worry about investing a lump sum or huge amount. So let us get started on knowing more about these fractional shares over here.
How does it work?
How a fractional share works are quite simple.
- Firstly, identify the company for which you want to invest. Find out the company’s ticker symbol. Use the symbol to identify the company within your investment platform (it can be a portal or an application).
- Instead of buying several shares or choosing the number of shares you want to buy, you can buy these shares in dollars, to as minimal as possible.
- Once this has been done, you are set to go, and the fractional share has been bought.
When committing to a lot of money is not your piece of cake, you can ideally invest in fractions. Whether you are looking at companies like Disney, where your favorite movies come from, or the company with the best tech and gadgets, Apple. It is not easy if your budget is smaller, but now that factor has changed, and it is easier than you thought. You do not need to keep saving to do so, now you can just go and choose to buy a fractional share.
Things you Need to Know Before Investing in a Fractional Share
1. You will be Starting Small, which Means Lesser Risks
When you invest a small amount in a fractional share, you are investing quite less than what you would do for a whole share. These fractional shares let you invest in smaller amounts leaving you in lesser volatility.
2. Diversification Comes as a Key Element
Diversification is an important element that comes along with fractional share investment. Let us just say you have 50 Dollars you can invest in 10 different companies even if it is just $5 for each fractional share.
3. You will Never Have Unvested Cash Left Behind
Let’s look through history. In the past, if you ever had money or extra money that was left after buying shares. But it was not enough to buy another share but with fractional shares in the picture, you can use up the left-out money.
4. Dollar-cost Investment
In dollar cost investments, you will be averaging, so you contribute the same amount to a long period of time. It is a strategy that also reduces the risks. Fractional shares mean you can constantly invest small amounts monthly or weekly.
5. Suitable Even for New Investors
New investors are usually more reckless with their money. That is why fractional share investing is a suitable method for new investors too. It involves lesser risk and still a good amount of profit.
6. Lack of Liquidity
There are obviously downsides to fractional shares. One of them is its lack of liquidity. When it comes to fractional shares, you might not always have immediate asset liquidation with you. These shares may not trade as frequently or as rapidly as a whole share. So, the brokers would wait to accumulate a lot of fractional orders to buy a whole share, which could reduce the speed of filing orders. Not every fractional share is high in demand, so it can sometimes take longer than anticipated.
7. Transfers Might Not Always Be There
Some brokers in the market would not let you transfer fractional shares to other brokers. They would rather transfer any full share and sell any fractional share to give you in cash. It can be an inconvenience as you may be able to re-purchase as quickly as brokerage. Liquidating fractional shares may have intended tax consequences if your fractional shares have increased in value.
8. You May Even Get Dividends
When you buy a whole share, you do get dividends, right? The same could happen even when you buy a fractional share and get a small amount of dividend, which is based on your investment.
By this, you have got an overview of how a fractional share could be an easy way to build a diversified portfolio. It stands still even when you do not have enough money to invest. It is more like a win-win situation when you look at it as a whole. You are exposed to lesser risks. So, if you are a new investor, you get to experience a lesser loss ratio. On the other hand, if you are an investor trying to expand your portfolio, you have a segment in your portfolio that is safe and risk-free.