If you like the idea of investing in the world’s biggest companies for as little as a dollar, fractional shares may sound like a great option.
These products allow you to buy portions of 1 whole share of global stocks. This way, you can invest in international markets even with a small amount of money.
Given the low costs, you may wonder if fractional investing is as good as it seems, or if there’s some kind of trade-off. Here’s a guide on the things you should consider before buying fractional shares.
1. Are they accessible?
First, you’ll need to find a broker that offers fractional shares of the companies you’re interested in. Not all brokerage platforms support fractional trading, and not all stocks are available for fractional investing.
When choosing a service, you should also consider convenience. Foreign platforms may require you to fund your brokerage account with US dollars through wire transfers.
As you compare options, find out how easy it would be for you to create an account, add money to it, and withdraw when you need to.
2. Are the fees worth the low entry costs?
Investing comes with fees whether you’re doing it the traditional way or exploring newer methods like fractional investing.
Brokers may charge commissions and fees for buying or selling fractional shares. You’ll also pay fees when transferring money from your bank account to your brokerage account and vice versa.
Since you’ll transact using another currency, fluctuations in the exchange rate can affect the value of your capital and returns.
Investment platforms may waive certain charges to attract more users. While the promise of zero fees can be enticing, you should always check the fine print to know if you’ll truly save on costs.
3. Do they match your needs and goals?
Whether you’re investing huge or small amounts, locally or abroad, the same basic principles of investing should still apply.
You still need to think about your risk tolerance, goals, and strategy when making decisions.
It’s also crucial to be financially stable and have enough emergency savings before you start investing so that you’re prepared for any losses or unexpected expenses.
4. What are the pros and cons?
You’ve looked at your options, explored the costs, and assessed your situation. You can now put together a list of the pros and cons to know if fractional shares are worth exploring.
Here are a few factors to keep in mind:
Advantages of fractional shares
- Fractional shares allow you to invest within your budget. Some platforms let you invest with $1 and so you don’t have to wait until you have enough to buy whole shares.
- You can invest in big-name companies whose individual stocks are valued at hundreds of dollars.
- You may be able to diversify against risks by tapping into the global market and investing in multiple companies at a fraction of the usual price.
- You’ll gain access to products that aren’t available locally or sectors that might have better growth opportunities abroad.
Disadvantages of fractional shares
- The exchange rate can impact your earnings since you’ll likely transact in US dollars.
- Not all stocks are available, and not all brokers support fractional investing.
- You might not be eligible for dividends or voting rights if the fraction you own is too small.
- There may be fees and commissions that can eat into your returns.
- Transaction costs may have a significant impact when trading fractional shares if fees are charged at a flat rate and not calculated based on the portion you own.
- You’ll need to grow your investing knowledge and skills to successfully navigate foreign markets.
5. Are there alternatives?
Though fractional investing has gotten more popular in recent years, the practice of buying small portions of stocks is not that new.
Some local pooled funds put money in international stocks, making these products available to Filipino investors at lower prices.
Such alternatives are worth considering if you want to invest in global assets but are not yet ready to pick individual stocks and navigate foreign markets on your own.
