Fractional shares allow you to invest a small amount of money in high-priced stocks. It is an ideal way for beginners to start investing in a diverse portfolio with only a small amount of money.
Traditionally stocks and shares have been traded in quantities that are whole numbers such as 1, 10 500, or 1000, for example.
That system worked perfectly well for decades but there were a few issues within it. Among them was the fact that retail traders were often excluded from being able to own high-priced stocks such as Amazon (one of the FAANG stocks), a stock that trades at around $3280 per share.
If you have a $10,000 portfolio, then at best you could own three shares in Amazon but of course, that would mean risk concentration or putting all your eggs in one basket.
Fractional share ownership gets around this issue by allowing investors and traders to own less than one share in a company.
So for example using fractional share trading, an investor can buy a tenth of a share in Amazon. The investors still get exposure to the price performance of the stock but at a fraction of the cost or face value of the security.
It might be easiest to think of the concept of fractional trading as owning shares in a share.
One share of Amazon would cost an investor $3280.00 plus commission, however, one-tenth of a share in Amazon would cost just $328.00 plus commission.
However fractional shares are not equities rather they should be considered a form of CFD or contract for difference, a derivative of the underlying instrument, rather than title to it.
Though fractional shares are not leveraged they do expose the client to the counterparty risk of their broker.
Fractional share ownership and trading are relatively new concepts and as such, they have not been adopted by every broker.
The list of securities that you trade using fractional share ownership, will usually be US-centric.
To trade in fractional shares you will need to open a share trading account with a broker that offers the service.
Here, we run through brokers that do and some that don’t below.
- Hargreaves Lansdown despite being one of the UK’s largest retail investment and share trading platforms Hargreaves Lansdown does not yet offer fractional share trading.
- Interactive Brokers are one of the USA biggest online brokers. they have offices and operations around the globe including an FCA regulated business in London. Interactive Brokers offers fractional share trading and investing. The firm claims to offer fractional trading on more securities than any other broker, existing clients can simply enable fractional share trading on their account whilst new customers will need to apply for a share trading account with the firm.
- WiseAlpha – lets you buy fractions of bonds with high minimum trade sizes through their notes.
- Revolut is one of several disruptors in the payments and personal finance space. The company which made its name in payments processing and money transfers has expanded into trading and investing services including fractional share trading in a list of US stocks via its smartphone app, across all of its account categories.
- Degiro Dutch Broker Degiro doesn’t currently offer fractional share trading and investing services.
- eToro takes a slightly different approach to its peers and it allows fractional trading in all the instruments it offers to clients. However, the platform is very basic and not for serious investors.
- Robinhood, a US-based online broker, was an early adopter of fractional share trading and its customers can trade in fractions of most US stocks, as long as they have a share price of $1.00 or greater and a market cap of $25 million or more.
- Trading212 offers fractional share trading and clients can invest as little as £1.00 a time into individual shares and ETFs through the firm.
- IG Group does not currently offer fractional share trading and investing services to its clients.
- AJ Bell is another popular retail broker that doesn’t offer fractional share trading and investing services.
The most popular fractional trading stocks tend to be those that have a high face value and in particular, those that are in tech and growth sectors.
Amazon is the classic fractional trading stock, alongside the likes of Alphabet, the parent company of Google. Other names that are often traded as fractional shares include Tesla, Netflix, Facebook, Microsoft and PayPal.
There are more than 150 stocks in the S&P 500 alone with share prices above $100 per share, pricing that makes it difficult for retail investors to own them, without using fractional trading.
Fractional share trading allows retail investors to gain exposure to securities that they might otherwise not be able to afford or accommodate within their portfolio.
And fractional share trading and ownership also allow investors to balance their portfolios.
As Dan Moczulski Managing Director of eToro UK put it:
“The key takeaway to fractionalised shares is not necessarily that people want to buy less than one share. It’s that they want to invest a fixed sum of money into certain shares, irrespective of the share price. E.g. they want to buy $2000 worth of Tesla.”
If you invest in or trade fractional shares you may be disfranchised from voting rights and corporate actions. Most brokers will try to make good on these items, however, this is likely to be at their discretion
Fractional shares cannot be transferred between brokers, as they are a form of CFD not a shareholding in the underlying company
So if you swap your current broker for another one you will almost certainly have to sell any fractional shares you have rather than transferring them to a new home.
We have also yet to see how fractional shareholders would be treated in the event of a default by a broker who offers these services, and where fractional shareholders would rank in the list of creditors in that event.
Fractional shareholders should receive a dividend entitlement pro-rata to their holdings.
So if you own a tenth of a share that pays a $1.00 dividend as a fractional shareholder you should receive a tenth of that dividend i.e. 10 cents.
However, the dividend will be apportioned by your broker and not the underlying company and therefore the size of the distribution could vary.
Fractional shares are traded through a broker, but as we noted above they cannot be transferred between brokers. Investors, therefore, have to sell fractional shares through the broker that they purchased them from.