A fractional share is a portion of a single share of a stock or other security that is less than one full share. For example, if a share of a stock costs $100 and you only have $50 to invest, you could purchase a fractional share representing 0.5 shares of the stock. I began my investment journey with fractional shares. There are a few reasons why investors may choose fractional shares.
Diversification Fractional shares offer investors a powerful tool to achieve portfolio diversification even with smaller amounts of capital. By breaking down the barriers associated with purchasing whole shares, investors can allocate their funds across a broader range of stocks and assets. This diversification strategy helps mitigate risk by spreading investments across different sectors, industries, and asset classes. Furthermore, it allows for greater exposure to various market opportunities, potentially enhancing overall returns.
Accessibility Fractional shares play a crucial role in democratizing investing by breaking down financial barriers and making it accessible to a broader population. By enabling individuals with limited funds to invest in expensive stocks such as Amazon or Alphabet (Google), fractional shares open doors to wealth creation that were previously out of reach. As a result, fractional shares promote financial literacy, independence, and the opportunity for individuals from various backgrounds to build wealth and achieve financial goals.
Cost-effectiveness Fractional shares offer a cost-effective investment solution for investors, providing a practical avenue for individuals to start investing with smaller amounts of money. The cost-effectiveness of fractional shares extends to portfolio management. As investors rebalance their portfolios over time, the ability to purchase fractional shares allows for precise adjustments.This flexibility makes it convenient to maintain an optimal asset allocation and adapt to changing market conditions, all while minimizing expenses.
Reinvestment Fractional shares offer investors the opportunity to leverage dividend payments for long-term growth. When an investor owns a fractional share of a dividend-paying stock, they can choose to reinvest the dividend to acquire additional fractional shares. This practice, known as dividend reinvestment, can have a compounding effect over time. By reinvesting dividends, investors can continuously increase their ownership in the stock, potentially leading to greater capital appreciation and higher overall returns.
Flexibility Fractional shares empower investors with increased flexibility in portfolio management. With the ability to sell or purchase fractional shares, investors can fine-tune their asset allocation and implement diverse investment strategies. This flexibility is particularly valuable when it comes to gradually adjusting portfolio positions. Instead of selling all shares at once, investors can sell fractional shares over time, allowing for a more gradual exit from a particular stock or asset.