The concept of fractional shares has existed for a long time. The idea behind them is they are part of a full equity sold to investors who cannot afford the full individual share price.
Major companies like Amazon are priced at nearly $3,000 in Q1 of 2021. Investors with lower budgets may not be able to buy a full share, so fractional shares allows them to own a little piece of Amazon.
Robo-advisors like SoFi Invest enable you to own fractional shares through your account there. But is this a good idea?
Check out our SoFi Invest review for more information and read on to find out more about investing in fractional shares.
Where Do Fractional Shares Come From?
Fractional shares themselves cannot be bought and sold on the stock market. They don’t exist in the markets directly. Instead, they come about due to several other factors, such as:
- Dividend Reinvestment Plans (DRIP).
- Stock splits.
- Mergers and acquisitions.
Although you can’t buy a fractional share directly from the market, these types of shares must exist due to basic math.
For example, if a stock split is carried out at a 3:2 ratio, three shares are created for every two shares an investor owns. If you owned three shares of a stock, your holding would become 4.5 shares after the split.
Many modern investment platforms are places where saving and investing are automated. Once you make a deposit, the platform will automate buying more and more fractional shares until you create a full share.
In this scenario, investors have a choice in the matter, and fractional shares are capable of maximizing every dollar.
How Can I Buy Fractional Shares?
Fractional shares can only be owned through a brokerage. The best robo-advisors all offer fractional shares in some form.
Platforms like M1 Finance and Stash are known to provide investors with a chance to own fractional shares. Full equities are purchased by the platform and then distributed to investors. There’s no way for a brokerage to purchase fractional shares themselves.
It should be noted that fractional shares are less desirable. Many investors don’t want to hold fractional shares, particularly if they gained them due to a stock split.
It all depends on demand. A hot company will always have a market for fractional shares. Most brokerages aim to combine fractional shares to make one full share, however.
Why Should I Buy Fractional Shares With SoFi Invest?
SoFi Invest allows the purchase of fractional shares through its program known as SoFi Stock Bits. You may buy a sliver of stock for as little as $1. Practically all major companies are represented in Stock Bits, such as Alphabet, Amazon, Facebook, and Nike.
The main benefit of fractional shares is they prevent money from just sitting in your account not doing anything. Any guide to investing will tell you to put your money to work and maximize every dollar.
SoFi ensures every dollar can be put towards your favorite individual stock or ETF.
Another reason to buy fractional shares is to maximize the passive income built up through stocks with high dividends.
Many investors prefer to buy monthly dividend stocks because it offers them a regular income. This is popular among investors who want to reinvest those dividends to buy more stock or people who are retired and want to live off the income.
Finally, fractional shares are an easy way of diversifying your portfolio when you have a smaller budget. In the beginning, it can be difficult to find the money to gain exposure to a broad segment of the market.
Fractional shares enable you to use your small change to easily build your investing portfolio. During the early years of your investing career, fractional share buying is a viable strategy.
What about the Fees?
Buy stock through a traditional brokerage and you’ll pay a fee on that trade. You’ll also pay a management fee at the end of the financial year just for the privilege of having that firm hold your assets.
Fractional shares can be dangerous because you’re buying less with the same fees attached. With many brokerages, it’s not advised to spend money on purchasing fractional shares.
However, SoFi Invest, and many other robo-advisors, charge no fees to make a trade and don’t charge monthly or annual management fees. This allows you to make a profit on fractional shares and not have your gains chopped up by high fees.
This is why these platforms are growing in popularity. They’re widening market access for all.
Fractional shares are not something all investors desire. However, investors who are just getting started on small budgets can benefit from them. Over time, the goal should be to build them up into full shares, but in the meantime, you can still build up value in your portfolio by using them intelligently.
Through investing with SoFi, you pay zero fees and zero commissions on all trades. If you’re looking to plan your financial future for less, this is the platform for you.
Have you considered owning fractional shares?