Have you ever looked into buying a stock only to get major sticker shock?
“Holy smokes, this stock costs $1,000 — I’ll never be able to afford it, let alone build a diversified portfolio!”
You, a clever problem-solver, may be wondering, “But wait. Can I only be a stock investor if I can afford to buy the whole thing? Or can I buy part of a stock?”
Fortunately, buying partial shares is possible, though it’s not a service that is offered everywhere. Traditional brokerage houses (banks that allow for the trade of stocks and other investment securities) may not allow for the purchase of partial shares, but many online trading platforms do.
Partial shares, also known as fractional shares, present the opportunity to buy stock in almost any dollar amount you have available to spend, instead of needing to buy the whole thing at whatever price it’s currently trading at.
This eliminates a big barrier to stock investing. With partial shares available, it allows investors who might be intimidated by the price of a stock to get into the game.
Can you buy partial shares? How does partial share investing work? Some answers to these questions are below, along with where you can access partial stock shares.
What are partial shares?
First, some basic information on stocks will be helpful in understanding partial shares: Stocks represent a small slice of ownership in a company. Stocks are sold in units called “shares,” and owners are often referred to as shareholders or equity holders.
Although this is an oversimplification of how it works, the hope is that the shares of your stock will increase in value as a company’s value increases. This is called “capital appreciation.”
Stocks may also earn you dividend payments, which are cash payouts made periodically to all shareholders (the price appreciation or depreciation of the stock plus dividend payouts equals the total return of a stock).
This is important to understand: The dollar value of a stock does not necessarily represent the value of a company.
For example, a stock that costs $1,000 is not necessarily bigger or smaller than the company whose stock trades at $10, nor is it a better or worse stock. The value of each share is a byproduct of how many shares the company has made available for purchase by the public.
At brokerage firms, stocks are generally sold in one-share units. Usually, there is a commission involved in trading stock shares in a brokerage account. For example, a brokerage may charge a $10 transaction fee to buy or sell a stock, whether you buy one share or 100 shares. This can make buying individual stocks expensive.
At these same brokerage firms, it hasn’t always been possible to buy less than one share, such as one-half of a share. With partial shares, the investor uses just about whatever dollar amount they have to invest.
For example, an investor with $100 who wants to buy a stock trading at $500 per share could simply use that $100 to buy as much of the share as they can.
How are partial shares created?
Before asking, “Can you buy partial stocks?,” let’s take a minute to examine where they come from. In the normal course of investing, partial shares can be the result of a stock split, company merger or acquisition, or a dividend reinvestment plan (called a DRIP).
A company may do a “stock split” for a number of reasons, resulting in a lower price per share. And sometimes, a stock split does not result in an even number of shares, creating partial shares.
For example, this may happen in a 3-for-2 stock split. If the investor holds 135 shares, they will have 202.5 shares after the stock split. The value of each individual share drops by one-third, but the investor still owns the same amount of stock by its dollar-value (because they own more stocks).
A company merger or acquisition could also result in partial shares. Some companies may opt to do what is called a stock merger. Here, a “conversion ratio” is named, which is the ratio that will convert the shares of the company being acquired. For example, an investor with 100 shares in a stock with a conversion ratio of 1.225 would end up with 122.5 shares of the newly merged company’s stock.
Another way that partial shares are created is through what are called DRIP programs. DRIPs are a way to invest directly in a company’s stock — and reinvest the cash dividend payouts back into that same stock. Because dividends don’t generally come in the size of a full share, DRIPs allow the purchase of a partial share.
Can you buy partial shares?
Though access to partial stock shares has been limited in the past, this is changing thanks to online trading platforms, which allows for the purchase of partial shares of many stocks and exchange-traded funds (ETFs).
This is not typically possible at brokerage firms and allows for smaller or new investors to get in the game without having to make big bets on really expensive stocks.
Another roundabout way to do partial share investing is through what are called a DRIP plans. With a DRIP plan, cash that is paid back into the account via dividend payouts are then “dripped” back into the stock.
DRIPs are an interesting option because they can have no transaction fees or other trading costs. Some companies facilitate their own programs, but DRIPs are more commonly offered through a transfer agent like ComputerShare.
If you want to get invested and are willing to use a fund to do so, you could also consider a mutual fund. Unlike an ETF, which also trades on an exchange and therefore often has the same types of commissions as a stock, mutual funds don’t always have such a fee, especially if you are buying low-cost index funds (but they do have fund fees).
A benefit to using a mutual fund is that investors are generally able to purchase mutual funds using a dollar amount, even if that amount would not buy a complete share.
Pros and cons of buying partial shares
The whole point of investing is to build wealth, no matter where you are in your investing journey.
You shouldn’t have to already be wealthy in order to invest in the stock market. Therefore, the primary advantage of buying partial shares is the ability to buy stocks or ETFs that might otherwise be too expensive.
With partial shares, you get to control exactly how much money you want to spend on each stock. Partial shares make it possible for you to build out an investment portfolio when you are ready — not once you’ve saved up enough money to buy pricey shares. And for many people, getting started is half the battle.
The ability to invest in partial shares may give young or new investors the opportunity to learn about investing with firsthand experience. For some, a hands-on approach to learning may be a more effective form of education than reading about investment ideas or concepts in dusty investment books.
Partial shares also give the investor more control over their investment portfolio, allowing them to build out a strategy using the desired amount of each stock. Buying a stock only because it has a low price-per-share? That’s no investing plan.
Partial shares may also make it easier to build a diversified portfolio. Diversification is the practice of buying different investment types with the purpose of mitigating risk. Another way to say this is that diversification can help smooth out your investing journey over time.
For example, a diversified portfolio may have stocks from different countries and that operate within different industries. It is considered risky to only hold one or even a handful of stocks, as you are then at the mercy of their performance only.
Unfortunately, partial shares are not accessible everywhere. And even if they were, it may not make financial sense to build a portfolio of small amounts of stock due to costs.
If brokerage firms are charging a transaction fee between $5 and $10 to buy a stock (whether it’s one share or 100), then they might charge this same fee for buying into a partial share.
And for investors who are investing small amounts in different partial shares, the fees may take too big a bite out of the overall investment to make much sense.
Luckily, there are options to buy partial shares that won’t end up costing the investor a fortune and shutting them out of the opportunity to build an investment portfolio.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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