Buying a company’s stock means you’ll own a small piece of that company. As part-owner, you may benefit from the growth of the business over time.
But what if even that small piece is too expensive for you? Thanks to fractional investing, you may still be able to invest within your budget. Find out how it works below.
What are fractional shares?
Fractional shares are slices of a whole share of a company. There are brokerage platforms that allow investors to buy fractional shares.
For Filipino investors, this currently only applies to global stocks since the Philippine Stock Exchange (PSE) doesn’t allow fractional trading yet.
However, fractional investing can still be an option if you want to start investing globally.
How does fractional investing work?
Here are the main characteristics of fractional investing that sets it apart from traditional stock trading:
1. You can invest the exact amount of money you want to invest
When buying a whole share, you’ll buy it at the price it’s trading for on the market. For example, if a share of a company costs $100, you need $100 to purchase it.
But what if you only have $5 to invest? If fractional shares of that company are available for trading, you can still buy 5% of a whole share, giving you a 0.05 share.
This can be helpful if you want to invest a set amount on a regular schedule, which is a strategy known as peso or dollar-cost averaging. You get to invest the entire amount, and only that amount, each time.
Say you’ll invest $50 every month and the stock you want is currently trading at $26. If you’re buying whole shares, you’ll only get 1 share.
The money that remains will sit as cash reserves in your account until there’s enough to buy another full share.
However, if you’re doing fractional investing, your $50 will get you 1 whole share plus a fraction of a share, or around 1.92 shares.
2. Your options may be limited
Not all brokers offer fractional shares, and not all stocks can be bought through fractional investing. This may limit your options if you’re not able to buy whole shares.
It may also be challenging to transfer your fractional shares to another broker if you wish to do so. Some services might only allow the transfer of full shares.
3. Getting shareholder rights and dividends may vary per broker
Typically, stockholders have the right to vote on company matters. However, some brokerages may require you to have at least 1 full share to gain voting rights.
If you own fractional shares of dividend stocks, and are eligible to receive dividends, the payout you’ll get will likely be calculated based on how much of 1 share you own. Some platforms may not issue dividends if your portion of a stock is too small.
Before buying fractional shares, make sure you understand how they work, the terms of ownership, and any fees you might need to pay.
If you’re not yet ready to navigate international markets, there’s another way to invest in portions of stocks. You can put money in local exchange-traded funds (ETFs) or pooled funds that contain stocks.
