Buying fractional shares is great, but it’s not always that easy. The hard part is finding a brokerage that will give you the power to do it.
A lot of financial institutions have a history of recognizing fractional shares due to splits or dividends, and yet only recently are some of the major brokerages starting to offer their investors fractional share programs.
Personally, I like M1, Public and Betterment. Keep reading to learn why each is great in their own way:
Best Fractional Share Investing Broker for Dollar Cost Averaging - M1
Dollar-cost averaging is a strategy I employ pretty religiously. It's when you buy shares regularly of the same investments repeatedly over a stretch of time. This lets you gradually grow a portfolio that can override the volatility involved in stock prices going up and down over that same span of time.
If you like this as much as I do, then you’ll like M1. They have a tool that they call ‘The Pie’. It’s a visual portfolio that lets you specifically see how the dollars you invest break out. You can fund your portfolio all at once, or you can set it to automatically purchase fractional shares of stocks in portions you set in your ‘pie’.
If you're a new investor, then this kind of long-term investing is a good way to get going. Choosing certain stocks means picking things that might roller coaster up and down in the near future, whereas dollar-cost averaging lets you invest smaller sums in intervals with an eye on the future.
Open an account with M1 or read our full M1 review.
Best Fractional Share Investing Broker for Stability and Security - Public
Public is a seeming contradiction. At the same time that they’re one of the newer commission-free brokers allowing investing through an app, they’re not actually all that new to the industry. However, they are a good source of fractional-share investing.
They don't do day-trading, and even the fractional share investing needs a bit more time to settle as compared to other platforms. Having said that, they let you invest in fractional shares via their app/platform while also having access to commission-free trading. On top of all that, they offer strong rates on your initial cash in your account, up to $10,000.
While the name Public is new, they're actually just a rebrand of Matador, which was one of the first-ever investing products based on app technology.
Public's legal name is still Matador Trading LLC, which itself is owned in full by TapX Trading & Analytics. It does business as T3 Securities, a fully registered broker, dealer, and member of both SIPC and FINRA.
Open an account with Public or read our Public App Review.
Best Fractional Share Investing Broker For Mobile Commission-Free Investing: Robinhood
Robinhood is well-known for a mobile app trading platform, one that appeals greatly to those who use mobile technology far more than desktops or laptops.
What really makes them shine, however, is that they don't charge fees. The only fees you'll pay are small ones required by the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Recently, Robinhood entered the fractional trading fray, with stocks available for companies whose shares are worth more than a full $1 and have $25 million or more in market cap. I personally use Robinhood and LOVE it.
Open an account with Robinhood or read our Robinhood Review.
Best Fractional Share Investing Broker for Effective Automated Investing - Betterment
Robo advisors are on the rise, and Betterment is leading the way for them. A robo advisor like Betterment has you fill out an extensive questionnaire where you detail your level of risk tolerance and investment goals. Then, the service takes over, as it invests your funds in a group of ETFs that align with the answers you provide.
Betterment charges 0.25% for management fees, which is pretty low. The lack of any trade fees is even better in my book. One impressive feature is that Betterment can actually place trades for you if you want. It can do this to keep your portfolio balanced automatically, and it can even arrange trades to benefit your taxes through tax-loss harvesting.
If you're really wanting a hands-off approach, then Betterment is the way to go. You just state your goals and when you need the money, and Betterment does the rest.
The downside, though, is you cant currently invest in individual stocks, so your fractional shares will be in an ETF. This is still a great way to diversify and invest small amounts over time.
Open an account with Betterment or read our full Betterment review.
While those are my favorite online brokers (for different reasons) that offer fractional-share trading, there are a few others that you should look into (and maybe some you’re already set up with that you didn’t realize had fractional investing):
- Stash: Want to follow a particular sector, strategy, or even a specific cause? This is the way to go. Stash limits its investments to just a few hundred stocks to suit a narrow set of lanes. You can start investing for just $5 and keep going for $3 a month.
- Charles Schwab: This brokerage pioneered the discount side of the industry, with nearly half a century of irritating Wall Street traditionalists who made a killing off of high fees and commissions. Schwab hasn’t been doing fractional share trading for long, but they have a long reputation for simplicity of use, global access, low/no account minimums, and very supportive customer service.
- Folio Investing: This brokerage offers two different plans that you can use to purchase fractional shares. Execute $4 trades via the Basic plan, or 2,000 free trades every month via the unlimited plan. Choose from over a hundred pre-built Folios or build your own. Each Folio can have as many as 100 ETFs, mutual funds, and stocks.
- Motif: This firm makes diversification easy. You can create your own investment theme or theory, and then buy fractional stocks instead of having to resort to an ETF. While effective for small nest eggs, Motif works better for seasoned investors looking to perfect or test a particular strategy.
Read More: Best Robinhood Alternatives
What Are Fractional Shares?
Anytime there is less than a full share of an equity, it's known as a fractional share. These can result from stock splits and other corporate actions. They can also be the result of DRIPs, or dividend reinvestment plans.
Fractional shares aren't usually available on the open market, but they do have investment value. Still, they're hard to sell.
Fractional shares can happen due to stock splits that don't happen evenly. Acquisitions and mergers also can result in fractional shares if the new common stock is developed via a predetermined ratio.
But that’s how fractional shares work within organizations. You’re probably more used to seeing and hearing about fractional shares in the sense of being able to buy less than a full share of stock at some online brokerages.
Some brokers now sell fractional shares online, but it has nothing to do with stock splits. Instead, it’s the broker allowing you to invest in part of a stock--and they work on the back end to make sure they’re fulfilling full-share orders (basically, you don’t have to worry about that part).
So for example, if you only have $10 to invest, you may be able to buy 0.10 shares of a $100 stock instead of having to have a full $100 for one complete share.
Related: Best Micro Investing Apps
Why Should You Buy Fractional Shares?
For starters, dividends are a great reason to buy fractional shares. In many cases, the dividends result in more stock holding, so a fractional share can be a seed that grows your equity within a single company without being restricted to whole units.
Also, there was a time that nearly all stocks traded for under $100 per share. If stock prices rose above that, they'd split the stock. More shares at lower prices made each share more affordable, and yet stock splits are nearly extinct.
Companies like Google and Amazon have shares well over $1,000. You can open up brokerage accounts and deposit $50 a month, but it would take you two years just to get enough cash for a single share of that cost.
I'm not that patient. Are you?
Fractional shares let you jump into the game faster so you don't miss out on a year or two of growth and dividends.
Fractional shares also mean that you don't leave any excess cash just lying around in your current brokerage account. You can put any sum to work for you.
You also get to seriously diversify your portfolio a lot easier, since you can buy parts of more companies instead of just the whole units of a handful of stocks.
Resource: Give Stock as a Gift
Fractional share investing is like saving up coins when everyone else only wants whole dollar bills. There are benefits to doing it, especially in terms of lower investment thresholds, the chance to get on the coattails of the major players for less money, and an opportunity for serious portfolio diversification.
If you’re looking to set it and forget it, then Betterment is the way to go. M1 is an effective way to employ the dollar-cost averaging strategy if you’re a believer in it. Public offers stability and security that can take some of the jitters out of doing any of this. And Robinhood makes it easy for anyone to get started. I’m sure one of these will work well for you.