Big name stocks are increasingly being accompanied by high price tags. One share of Alphabet was worth more than $2,000 as of August 2022, whereas one share of Amazon, Inc. was worth more than $2,500. Thankfully, fractional shares allow you to buy the most costly stocks and ETFs for as little as $1.
For beginning investors who might not have large balances available to purchase certain companies or ETFs, buying fractional stock is a blessing. They also make it simple to diversify a smaller portfolio by making investments in businesses that might otherwise be out of your price range.
We cover all the details of fractional share investing in the UK in this article. We also address how and where to invest in fractional shares, as well as some useful information on how fractional shares actually operate.
How to buy fractional shares : A Step-by-Step Guide 2022
This basic approach is followed when buying fractional shares, albeit your brokerage may have somewhat different procedures.
- Open a Trading Account – Select a broker that accepts fractional shares and open an account with some basic information.
- Make a Deposit – While some brokerages wait for the deposit to settle, which could take 3 to 5 business days, others let you open the account and start buying shares right away.
- Choose a stock – Remember that even while some brokerage houses might let you purchase fractional shares, they might only be available for particular corporations.
- Determine how much you wish to invest – You can select to invest using the number of shares or the dollar amount at some brokerages. If you invest using a dollar amount, you are investing in fractional shares, however, if you choose the number of shares, you are often investing in complete shares only.
What are fractional shares?
By purchasing fractional shares, a shareholder has the opportunity to own a small portion of shares of stock. They can also be used to purchase exchange-traded funds, which are index funds that can be traded all day long.
This has numerous advantages for investors. They democratize access to ownership in businesses that smaller investors would not otherwise be able to obtain. As a result, investors with smaller portfolios have the ability to diversify their holdings rather than needing to invest their entire balance in a single share with a higher price.
Although the concept of fractional shares has been around for some time, regular investors have only recently been able to purchase and sell them. As instance, participating in a dividend reinvestment plan frequently results in the possession of a fractional share.
A shareholder may also end up with fractional shares as a result of a merger or stock split. You would own three shares for every pair of shares you currently own if a corporation did a 3-to-2 split. In this scenario, a shareholder holding nine shares would ultimately own 13.5 shares. Fractional shares, as their name implies, are pieces, slivers, or slices of stocks and ETFs that are less than a full share.
If you don’t have enough funds to purchase a whole share of the company or if you prefer to spend a set amount of money, you might wish to acquire fractional stock.—say, $100—monthly in a stock or ETF rather than trying to buy a round number of shares with a volatile stock price, say, $90 one month and $150 the next.
When a company splits its share, it raises the number of shares it has by giving extra shares to shareholders. For instance, in a 3:2 stock split, you would get three shares for every two that you already own. Therefore, if you previously held 15 shares, you now own 22 1/2 shares. That extra half equity is known as a fractional share. You would receive two shares for every three you currently possess in a reverse stock split of 3:1.
Dividend reinvestment plan (DRIP)
A DRIP allows for the automatic purchase of additional shares using dividends received from a firm or fund. Investors may end up having fractional equity as a result of this. Assume you held 200 shares of a corporation with a $0.30 annual dividend payment. This year, you would be eligible for dividends worth $60. If the stock was valued at $40, the dividends will immediately buy one and a half shares. You would ultimately hold 201 1/2 shares of stock.
Mergers and acquisitions
When a firm merges or is purchased, its stock may be swapped for new shares. To merge equities from various companies, they typically utilize a ratio, thus three shares of Company B may become five shares of Company A. Fractional shares could be produced by this procedure.
How do fractional shares work?
In many ways, these shares function much like whole shares. Depending on the brokerage, fractional owners may also have the same advantages such as voting rights, and receive the same percentage gains and losses as those who own full shares. Any dividends paid by the company may be received by fractional owners.
Let’s imagine that the share price of the imaginary business ABC is $100. You choose to put merely $50 into the market, giving yourself proud ownership of 1/2 of the ABC stock. You’d get $0.50 if ABC declared a dividend of $1. Your investment would increase by 10% from $50 to $55 if the company’s share price increased from $100 per share to $110 per share.
If business ABC performs a 2:1 stock split, using our original price per share of $100, you would now possess one whole share for $50 and the entire share owner would have two shares at $50. The overall sum spent is unchanged because the holders of these shares still have $50 invested and the holders of whole shares still have $100 invested.
Although these shares are typically just as simple to purchase and sell as full shares, there may sometimes be a few disadvantages that you should be aware of, which we’ll go over in more detail in the coming part.
How to buy Fractional Shares?
Now that you are knowledgeable with fractional shares, we will guide you through the investment procedure
Step 1: Choose a Stock Broker
The first thing you should do is find a stock broker who deals in fractional shares. The number of platforms offering fractional ownership is still increasing even though established companies still control the majority of the UK investing market. Additionally, you shouldn’t pick a broker solely because it provides fractional shares.
Contrarily, you should also consider factors like the share kinds it offers, the least an investor can invest, fees and charges, and accepted payment methods.
With all of this in mind, you may read a review of brokers who let you buy fractional shares below.
Over 26 million people throughout the world utilize the popular broker eToro.
Its support from fractional shares is at the forefront of this. In fact, consumers can buy stock in a company for as little as $50, or approximately £40. Over 800 companies from 17 different markets are included in its database of stocks and shares. This contains a lot of available shares, with important stocks listed not just in the UK but also in the US, Germany, France, Hong Kong, and other countries.
You have the choice to buy shares using eToro without paying any commissions at all. Users of eToro can trade share CFDs in addition to buying shares, with leverage up to 1:5. Additionally, the CFD spreads are affordable. Additionally, you may buy supermarket stocks on eToro with a $50 minimum investment and zero commission.
The CopyTrader tool is an additional function that is extremely well-liked by novice investors or those short on time. This lets you choose an experienced share investor and then mimic their moves exactly, as the name suggests. Therefore, you can utilize the CopyTrader to invest without performing any effort if you’re a beginner who is still learning how to buy stocks. With a $10 minimum investment and no cost, eToro also lets you invest in NFT stocks.
Your money is secure because the broker is governed by the FCA (as well as ASIC and CySEC).
Learn more: eToro Broker Review UK 2022 – Complete Guide
CFD instruments and other asset types are available for investment on the online trading platform Plus500. As a result, you will be “trading” shares rather than “investing” in them. The site provides thousands of additional instruments in addition to more than 2,000 stock CFDs. This contains a tonne of marketplaces in the UK and abroad, allowing you to easily diversify.
You can trade fractional stock CFDs with Plus500 if you only wish to invest a modest sum. As a result, you will be betting on the CFD in question’s short-term price movement. You can choose between taking a long (purchase position) and a short position (short position). You could also use leverage on your positions, which would involve trading with funds outside of your account.
For UK retail traders at Plus500, this is 1:30; however, if trading stock CFDs, it is decreased to 1:5. Simply put, this indicates that you may open a CFD position worth £750 with a £150 account balance. However, professional traders will be given far greater limits. If this particular platform appeals to you, you may quickly register an account.
On the broker’s own proprietary platform, which includes helpful features like price alerts and simple charting, trading on Plus500 is conducted.
Only £100 is required as the minimum deposit amount is at Plus500. You will not be charged to make a withdrawal or deposit money. Plus500UK Ltd is licensed & governed by the FCA (#509909) in terms of security. The parent firm of the platform is also traded on the London Stock Exchange.
Learn more: Plus500 Broker Review UK 2022 – Complete Guide
Step 2: Open an Account
You must first create an account on the site you have chosen to use to buy or sell fractional shares. No matter which broker you choose, the process is the same in that you will need to give certain personal information.
You will need to have your identification verified because you will be utilizing an FCA-regulated broker to buy fractional shares. In reality, the procedure can be finished in a few minutes.
Step 3: Deposit Funds
You will be required to deposit money into your brokerage account after the verification process is complete.
Step 4: Buy Fractional Shares
We will now walk you through the ordering process for purchasing fractional shares in the UK after you have funded your trading account.
Prior to anything else, you must choose the stock you want to buy. On the search bar of your preferred platform, type the name of the stock and press Enter.
Confirm your purchase by entering the amount you desire to invest in the stock.
Benefits of Fractional Shares
- Begin with little investments: If you’re just getting started and don’t have much capital to work with, fractional shares can be a lifesaver. You can immediately join the market and win from accumulating gains thanks to them.
- Reduce the cost of portfolio diversification: Diversification is one of the fundamental principles of portfolio construction. You can lessen your risk of losing money if one of your stocks crashes by investing in a range of equities, especially ETFs.
- Better possibilities for dollar cost averaging: You routinely invest a predetermined sum of money when you use dollar cost averaging. Dollar-cost averaging works best when you can invest the full amount because it concentrates on a consistent dollar amount rather than a steady share amount. If not, you will need to wait until you have enough cash in an account to acquire a whole share.
Drawbacks of Fractional Shares
- Limited number of stocks: Fractional investments are not permitted in all equities. If you buy fractional shares, you might not have as many options for companies.
- Liquidity: With your fractional shares, you could not have instant asset liquidity. It’s possible that fractional shares don’t move as frequently or quickly as complete shares. Order filling times may be slower since brokers hold off on purchasing whole shares until they have enough fractional orders. Additionally, it may take longer to buy or sell your fractional shares occasionally because not all fractional shares are in great demand.
- Transfers: Some brokers forbid you from transferring fractional shares to different brokers. Instead, they sell any fractional shares and transfer any complete shares to pay you cash. If you can immediately repurchase shares at your new brokerage, this might only be a minor annoyance. However, if the value of your fractional shares has increased, liquidation them may result in unforeseen tax repercussions.
- Dividends: You will receive the sections of stock dividends if you possess fractional shares, just as fractional equities only represent a portion of a full share. Therefore, if a dividend is $0.50 per share and you own half of a share, your payout will be $0.25.
Fractional shares can be an excellent method to enter the stock market gradually, own businesses that are ordinarily out of your price range, and diversify your portfolio as opposed to investing the majority of your account balance in a single stock.
Although fractional shares have a few drawbacks when it comes to switching brokerages, investors are still entitled to the same proportional gains and dividends, thus the positives considerably outweigh the drawbacks, especially for small retail investors.
Frequently Asked Questions
Can I purchase fractional shares of dividend stocks?
Yes, you can buy fractional shares of dividend paying stocks, but how many stocks you possess will determine how many dividends you earn. As a result, if you invest $25 in a stock with a $100 per share price and a $1 dividend, your dividend will only be 25 cents.
What if I purchase fractional shares and a stock split occurs later?
Your fractional shares won’t be impacted by stock splits any differently than if they were complete shares. If a business splits its shares two for one, you would now hold seven shares instead of just 3.5. However, the overall value of those shares remained constant.
Can I purchase fractional shares of exchange-traded funds?
Yes, certain brokers do provide fractional shares of ETFs.