Fractional investing is a game-changer for anyone who wants to start investing but doesn’t have the funds to buy whole shares of expensive stocks or assets. It allows you to purchase a “fraction” of an asset, making it easier to dip your toes into the investment world, diversify your portfolio, and build wealth over time without needing a massive upfront investment. Here’s everything you need to know about fractional investing and how to get started.
What is Fractional Investing?
Fractional investing means buying less than a full share of a stock, bond, or other investment asset. Traditionally, if a stock was priced at $1,000, you’d need that entire amount to purchase a share. With fractional investing, you can invest as little as $1 or $10 and own a portion of that $1,000 stock. Your ownership is proportional to the amount of money you invest.
How Does Fractional Investing Work?
- Platforms and Brokers:
Many online brokerage platforms now offer fractional investing, including popular apps like Robinhood, Fidelity, and Charles Schwab. These platforms allow you to specify the dollar amount you want to invest, and they convert that into fractional shares based on the current price of the stock. - Proportional Ownership:
When you buy a fraction of a stock, you own a percentage of that stock’s performance. If a company pays dividends or experiences price appreciation, you receive your proportionate share of those gains based on your fractional ownership. - Low Barriers to Entry:
With fractional investing, you don’t need to wait until you’ve saved up enough to buy full shares of expensive stocks. You can start investing with just a few dollars, which is perfect for beginners who want to test the waters without a major financial commitment.
Why Consider Fractional Investing?
- Affordability:
You don’t need a large sum of money to get started. Fractional investing makes it accessible to anyone, regardless of their financial situation. - Diversification:
You can spread your investment across multiple stocks or assets, even if they are high-priced. This lowers your risk because your money is distributed across different investments rather than tied up in one. - Flexibility:
You can invest in companies you believe in, regardless of their stock price. Love Tesla or Amazon but don’t have enough cash to buy a full share? Fractional investing lets you own a piece of the action.
What Can You Invest in with Fractional Investing?
- Stocks:
The most common form of fractional investing is in stocks. You can buy fractions of individual stocks in companies like Apple, Google, or Netflix. - ETFs:
Some platforms allow fractional investing in exchange-traded funds (ETFs), which are baskets of assets (stocks, bonds, etc.) that give you exposure to a wide variety of investments in one go. - Cryptocurrencies:
Many platforms also allow fractional purchases of cryptocurrencies, like Bitcoin or Ethereum, where prices are often too high for a typical investor to buy a full coin.
Pros of Fractional Investing
- Accessibility:
You can start investing with a small amount of money, removing the traditional barrier of needing a significant sum to invest in expensive stocks. - Diversification:
It makes diversifying your investments easier. You can spread your money across multiple stocks or assets, minimizing risk. - Dollar-Cost Averaging:
You can make consistent, smaller investments over time, a strategy known as dollar-cost averaging. This smooths out the highs and lows in the stock market and reduces the impact of short-term volatility.
Cons of Fractional Investing
- Limited Availability:
Not all investment platforms offer fractional investing, and not all stocks are available for fractional purchases, though this is improving. - Small Returns:
While fractional investing is a great way to start, your returns will be proportional to the size of your investment. Small investments will result in smaller returns. - Fees and Restrictions:
Some platforms may charge fees or have restrictions on fractional shares. It’s important to check the terms of your platform to ensure you’re getting the best deal.
How to Get Started with Fractional Investing
- Choose a Platform:
Start by selecting a brokerage or app that offers fractional investing. Popular platforms like Robinhood, Fidelity, Charles Schwab, and SoFi all offer this feature. Research the fees, available assets, and minimum investments to find the one that suits your needs. - Set Your Budget:
Decide how much you want to invest. With fractional investing, you can start small, so even $10 a week can add up over time. - Diversify:
Spread your investment across a variety of assets. This might include individual stocks, ETFs, or even cryptocurrencies, depending on your interest and risk tolerance. - Monitor Your Portfolio:
Keep an eye on how your fractional investments are performing, but avoid the temptation to check every day. Investing is typically a long-term strategy, and short-term fluctuations are normal.
Final Thoughts
Fractional investing is a fantastic way to start building your investment portfolio without a large upfront cost. It offers flexibility, accessibility, and the chance to own shares of companies you believe in, even if their stock prices are sky-high. As you grow more confident in your investing, fractional shares can help you diversify and optimize your portfolio over time. With the right strategy, you can build wealth even with small, steady contributions.