Fractional Shares: Investing for the Masses

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Stocks you trade, it’s wives you’re stuck with.
– Edward C. Johnson II

After the stock market plummeted in mid-March due to COVID-19 concerns, it has roared back as investor concerns about a recession and COVID-19 have receded. For example, the S&P 500 index is up nearly 40% from mid-March. Because of stay-at-home orders in many parts of the country, many Americans have recently become interested in investing and the stock market. Some people have even used part of their stimulus checks from the US government to invest in the stock market. Many notable companies, such as Amazon and Google, are trading near their all-time highs. There are also companies that have extremely high stock prices such as Berkshire Hathaway Class A shares which currently trade close to $300,000. To beginning investors, these high stock prices can be daunting since they would need at least a couple thousand dollars to buy just one share.

However, several brokerage firms such as Charles Schwab, Fidelity, Vanguard, and Robinhood are offering individual investors the opportunity to purchase fractional shares of publicly traded companies. A brokerage firm is a company that connects buyers and sellers to stock exchanges to trade with each other. They also allow consumers to trade stocks, bonds, ETFs, mutual funds, and other types of investments and securities. Let’s take a look at fractional shares.

What Are Fractional Shares?

A fractional share is less than one full share of stock in a publicly-traded company. Before fractional shares, you would typically have to buy or sell at least one share of a company. However, some investors would be less inclined to invest in high-priced stocks like Amazon. Amazon’s share price is currently near $2,500. An investor would at least need that much to purchase one share of Amazon.

However, fractional investing allows investors to invest in these companies without purchasing a full share. For example, if an investor wanted to invest $500 into Amazon, they could buy 0.2 fractional shares. The 0.2 fractional shares come from $500 invested into Amazon, divided by Amazon’s current share price ($2,500). An investor who might not have the $2,500 to buy one share of Amazon can now buy a fraction of a share of Amazon instead. While 0.2 fractional shares might not seem like much, it allows you to start investing and grow your money over time.

Charles Schwab’s fractional shares program

Impact on Investing

Several brokerages, including Charles Schwab, Fidelity, and Robinhood now offer the ability to buy fractional shares. Charles Schwab advertises it as Schwab Stock Slices™, Fidelity offers it as Stocks by the Slices™, and Robinhood calls it Fractional Shares. However, fractional shares aren’t a new concept in the brokerage industry. Fractional shares existed through DRIP (Dividend Reinvestment Program) investing and mutual funds. DRIP investing allows investors to reinvest the dividends from the stocks they owned into more shares of the same stock. Since the amount of the dividend payment depends on how many shares you owned, it would often result in a dividend payment worth less than or more than the exact price of a share of that stock.

As a result, the DRIP program at your brokerage would purchase fractional shares of the stock. Fractional shares are also common when purchasing mutual funds. Mutual funds are bought through dollar amounts instead of in shares like in stocks and ETFs. When you invest in a mutual fund, you often get some fractional shares in the mutual fund because your investment isn’t evenly divisible by the share price of the mutual fund.

A Victory for The Small Investor

The brokerage industry has become more consumer-friendly over the years. With the elimination of trading commissions and expansion into banking services, brokers are trying to expand their reach. While investing and stocks can appear daunting, the lowering of barriers and a plethora of investing resources online make investing in stocks more accessible than ever. Fractional shares are the latest example of more restrictions to investing being knocked down.