We’ve all been through that moment when we want to start investing in the stock market, but we have little capital and a lot of enthusiasm and hope. The moment when we realize that our favorite stocks are very expensive, and either we will have to wait several months to make a good entry, or we will have to look for other more affordable values to be able to open our initial position.
This new investment method has emerged precisely to solve this problem. And it is because fractional shares have come to democratize and expand the world of investment beyond the carpets of Wall Street and Frankfurt.
What are fractional shares?
Fractional shares are a form of investment in which you buy a fraction of a share instead of a whole share, allowing investors to invest smaller amounts of money in the stock market, and above all, access those companies whose quotation is completely unattainable. This democratizes the investment capacity and makes such art, more accessible to a larger number of investors.
Similarly, it can be applied to ETFs.
In fact, if you are familiar with cryptocurrencies, you will already know that you can buy parts of a bitcoin – for example-. In the same way, and with the advances in technology, it can be done in stocks and ETFs.
Instead of acquiring a share that may be at a very high market price for our possibilities, buy the part of those shares that fits our current budget.
For example, we could take the company Berkshire Hathaway Inc.
Price of Berkshire Hathaway shares (BRK.A)
At the time of writing this article, its NYSE quote is around 500,000 USD. If you think this price is out of your reach, but still, would like to participate in its business model, you could buy a fractional share of Warren Buffett’s holding.
However, this fact is not only applicable to shares with elephantine quotes exceeding 100,000 dollars, it can be applicable to any share.
Moreover, it is studied that the average household in The UK saves around 250€-300€ per month, and that’s assuming there are no unforeseen events, such as broken glasses or an urgent root canal.
What does that mean? Well, to be able to buy a share over 150€, you would have to save for two or three months to open a relatively strong position, and on top of that, you would be putting all your capital in one basket, which goes against any principle of common sense investing.
That’s precisely why, the disruptive innovation of fractional investing represents the democratization of investing for all households as it will allow investing in companies that- until now- were not within the reach of all wallets.
👉 And for more information, in the following article you will find many more options on how to invest in the stock market.
How to buy a fractional share safely?
Now that we have explained what it means to buy fractional shares, let’s see how to proceed to buy fractional shares and ETFs.
How to buy fractional shares in 5 steps?
Let’s see how we could make our first fractional investment. There really isn’t much difference from buying any share -or not fractional-. So, to better exemplify it, I will choose the broker XTB
1. Open an account with your broker: First, you must select a broker that offers fractional shares, and open an account with them. In my case, I will choose XTB where I already have an account.
2. Deposit money: To buy fractional shares, you first need to have funds available in your brokerage account. Make your first deposit, Remember that in brokers like XTB, you can practice fractional investment from 10€
3. Select the share: Search for the share you want to buy fractionally and enter it in the search engine, it could also be its ticker or ISIN. In my case, I will select the LVMH share (MC.PA), which is listed on the Paris stock exchange, for the account of 900 euros.
4. Indicate quantity to buy: The next step is to select the volume, or the number of shares you want to buy. In my case, because it is an excessively expensive share, I will only select a volume of 40% of it.
This means that I will only buy 40% of a share, so if at this moment LVMH is trading at 900 euros (approx), by buying 40% I will only invest around 350 euros, and I will be participating in one of the most solid companies in the European market.
When you also enter your volume order, click on the green buy button.
5. Confirm purchase order: Finally confirm the market purchase order. See the screenshot.
- Red box: I confirm that the full share price is 874.30 euros (red box)
- Orange box: I confirm that I have entered the market for a purchase order, with a volume of 40% of a share, which will require a total investment of almost 350 euros, at 0 euros in commissions
- Green box: If I agree, I click confirm.
And that’s it. From this moment I am a shareholder of 40% of an LVMH share. Did you find it easy?
7 companies for fractional investment
Well, we have already seen how to buy a fractional share, so now I leave you with several options of robust companies with shares at a very high price -remember that this is not bad at all, where fractional investment might be the best option to practice a correct portfolio diversification, investing with little money.
Therefore, the value of the shares of these companies exceeds 150 EUR / USD / GBP, so thanks to the possibility of obtaining fractions of shares you can invest in them, without needing to wait 2 or 3 months to save a good entry position.
Buy Fractional ETFs
The same procedure occurs when you decide to invest in ETFs. The only thing that changes is its nature – since the same ETF is a compendium of investments- but it remains an asset in itself. Therefore, you can buy part of this asset and its operation is the same.
You acquire part of this asset and you adhere to the proportional benefits of its movements in the market. With the particularity that the sale of it (of the fraction you own) may be easier and faster. Why? Because the same ETF agent takes care of balancing the purchases and sales.
Why invest through fractional shares?
1.- Greater diversification
Obviously, the first advantage is having greater exposure, and therefore, multiplying our possibilities while minimizing the amount invested in a certain value. This way of investing facilitates us is the accessibility to a greater number of assets.
2.- Same performance
Revaluation of a share
The yield obtained is proportionally the same. If it goes up by 20%, we will have that percentage of profit, but in proportion to the investment made in that value. In other words, we have the possibility of investing in values that, perhaps before, would be too costly to acquire. Now with this method – fractional investment -, it is possible to “enter” companies whose shares have a very high market price.
Let’s suppose that you have acquired 50% of a share of the company CAF, the highest in the ibex by price. The railway company was trading at the time of its acquisition at a price of 300 Euros per share. Your investment would have been 150 euros. If you sold it at a price of 420 euros, the percentage increase would have been 40%, that is, with this investment, you would have increased the initial capital by 60 euros, that is, you would now have 210 euros.
What has happened? Simply, with less investment, you would have obtained the same percentage of profitability. The fractional investment has given us the opportunity to invest in a value that does not fit our portfolio without having to acquire it in full. And also, partially, we have been able to diversify our portfolio.
At the same time, we must remember that if the company pays a dividend, fractional shareholders also have the right to receive it fractionally to their investment, in the same way as shareholders who own the full share.
That is, if they invested in 40% of the value of a share, they will receive 40% of the dividend, which the company distributes among its partners.
3.- Same ease to buy and sell shares
Fractions of shares can be bought and sold, just like whole shares, with the same ease that your broker offers
Now you can build a diversified portfolio regardless of your investment budget. Therefore, it has greater exposure, mobility, and – without a doubt – the same ease.
4.- Greater experience in the market
As we have already pointed out, having access to more assets, your exposure multiplies while your risk is minimized, since you do not invest the total amount, but partially.
This fact of having greater exposure to other assets will make you gain much more experience when managing your assets in the market. It is not the same with little money to invest two or three times (because you can’t do more), than to enter 10 times and be more attentive.
You will learn more about the market, you will seek to train more, and with everything, you will gain more experience.
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5.- Shorter waits
By owning a larger number of assets, you can move the portfolio more fluidly. As we have already pointed out, it is not the same to have your investment focused on 4 companies than to have assets from 14 different companies. Some values may have been acquired at a good price and their prospects are positive, but at that precise moment, they are frozen by a specific event. In this case, it is not advisable to sell them, so you would find yourself in the situation of not being able to take advantage of an opportunity.
Having a larger portfolio allows you to “play” at a different pace and with much more ease. This is known as opportunity cost.
The option to move and liquidate more quickly and thus take advantage of sudden market movements. That is, if you detect an opportunity, and you can’t move an investment because it’s in a good bullish moment (or you’re at a loss), you’re sure to have another one in a lateral moment that you don’t mind liquidating or a small available capital of 100€ or 200€ to enter.
Pros and cons of fractional investing
Finally, let’s look at a list of the main advantages and disadvantages of investing in fractional shares.
Pros of buying fractional shares:
✅ Possibility of investing with little money
✅ Greater portfolio diversification.
✅ Allows dividend collection
✅ Greater exposure to different markets, currencies, and sectors, by being able to send reduced-size orders
✅ Acquisition of more experience
✅ In summary, democratization of investments.
Cons of buying fractional shares:
❌ Same commissions
❌ As is evident, you participate in the proportional part of the profit.
In conclusion, the impossibility of not entering the market because my favorite values are more expensive than I can afford is no longer going to be a problem, because fractional investing has come to democratize the financial world even more and make it accessible to all pockets. The future has arrived.
How can I buy fractional shares?
To buy fractional shares, you need to open an account with a brokerage that offers this feature. Once you have funds in your account, you can search for the stock or ETF you want to invest in, specify the amount you want to purchase, and place your order.
Can I sell my fractional shares?
Yes, you can sell your fractional shares just like you would with whole shares. You can sell them in part or in full, depending on your preference.
Do fractional shareholders receive dividends?
Fractional shareholders are entitled to receive dividends in proportion to their ownership. If you own 10% of a share, you will receive 10% of the dividends paid by the company.