Fractional shares: How they work and where to buy them
To explain fractional shares, let’s turn the clock back a few decades to a Stanford professor who turned $100,000 into $1,000,000,000. His name is David Cheriton, and he met Google co-founders Larry Page and Sergey Brin while they were Ph.D. students.
Cheriton gave the co-founders valuable advice and ultimately invested $100,000 in their startup, Google. Today, Cheriton’s investment in Google is worth about $1 billion. Imagine if you believed in Google’s mission years ago but couldn’t invest due to high share prices.
With fractional shares, owning a variety of assets is more accessible than ever. The ability to buy a slice of a stock has broken down barriers to enter the investing world, allowing people to diversify their portfolios and invest in assets with high share prices. Before investing in fractional shares, it’s important to understand what they are and how they can fit into your portfolio.
What are fractional shares?
A fractional share is any amount less than one full share. It can result from stock splits, mergers and acquisitions, dividend reinvestment plans, and other corporate actions.
Although fractional shares don’t trade on the stock market, they’re available through brokerage firms (including M1) and allow investors to have partial ownership in a variety of companies with high-priced stocks. M1 splits every share into 1/100,000th of a share so you can trade exact amounts of each based on the targets set in your portfolio.
To understand how partial shares work, imagine you want to invest in Company XYZ whose current share price is $2,000. You only want to invest $1,000, so you use the money to buy one-half of a share.
Specifying the amount of money you want to invest and purchasing the number of shares your spending power allows is called dollar-based investing. You can use this investing method to buy fractional shares at certain brokerages, including M1. Before investing, make sure the brokerage offer commission-free trading so you don’t have to pay transaction fees every time you buy partial shares.
People who are invested in Dividend Reinvestment Plans (DRIP) will be familiar with fractional shares. The difference with M1 is that you can easily buy and sell these shares directly through the platform. You don’t have to own a bunch of full shares first and sign up for a DRIP program. Anyone can buy a piece of any security from the NYSE, NASDAQ, and BATS exchanges with M1.
Why invest in fractional shares?
Investing in fractional shares comes with several benefits, particularly if you’re using a dollar-cost averaging strategy and regularly invest a set amount of money every month. Here are a few major advantages:
1. You can diversify your portfolio at a lower cost.
Whether you have $1,000 or $10,000 to invest, you can use fractional shares to purchase a variety of assets. Distributing your investments, rather than lumping together large chunks of money to purchase one share, helps diversify your portfolio. This is an important part of mitigating risk as a long-term investor since it lets you select from a wider range of stocks, ETFs, bonds, and more.
2. Your capital allocation plan stays on track.
Purchasing fractional shares and setting up automatic rebalancing can keep your target capital allocations as close to your plan as possible. This ensures that you don’t become unintentionally overweight in one asset and throw your portfolio out of balance.
On M1, you can use auto-invest to automatically distribute your deposits according to your target allocations. If you regularly invest $1,000 in 10 different companies and want to allocate 10% to each, you’ll purchase $100 worth of shares from each company with every deposit.
3. You can get the most out of every dollar.
When every dollar is invested in fractional shares, no money is left lingering in your account. For long-term investors who regularly contribute to an investment account, this means you’re purchasing some amount of stock with every contribution. Although letting several hundred dollars sit until you have enough to purchase one share may not seem like a major deal, it can impact your compounding interest and overall wealth in the long run.
What to know before buying fractional shares
For all the benefits of fractional shares, they do have downsides — just like every other form of investment.
• They are not available everywhere. Even though you always have the option to buy fractional shares on M1, not every brokerage allows you to buy fractional shares.
• You can quickly accumulate fees. If your brokerage charges fees on trades, you could rack up fees if you’re constantly trading fractional shares. At M1, you won’t be charged for purchasing fractional shares.
• They are limited in international markets. Even though fractional shares have become popular in the US markets, they haven’t become widely popular in international markets. If you’re looking to invest in foreign markets, you may have to purchase full shares.
• Stock splits impact fractional shares. In the event of a 10-for-1 split, investors who hold less than one share ahead of the split will get ten additional fractional share equivalents. If you hold half a share before the split, you’ll end up holding five shares after the split. An investor holding a quarter of a pre-split share will end up with two and a half shares afterward.
How to buy fractional shares
In the simplest terms, here are the steps needed to buy partial shares:
- Open an account.
- Deposit money.
- Select the stock or ETF you want to invest in.
- Choose the amount of money you want to invest.
Long gone are the days when you need $1,000 to invest in a $1,000 per share company. Simply choose the amount of money you want to invest and let your brokerage platform (if you’re using one that offers fractional shares) acquire shares of the company or ETF you choose.
Customize your portfolio with M1
At M1, we believe you should be able to buy anything we offer. That’s why we’ve offered fractional shares for years. No matter how expensive a share is, you can customize your portfolio to your liking.
With a recurring funding approach at M1, we try to make it easy to accumulate wealth over time with even small contributions. There’s no commission for buying and selling fractional shares, and we will trade at the market price of a full share.
Start investing in fractional shares on M1 to take control of your financial future.
Originally published August 7, 2017, updated June 16, 2022.