What Are Fractional Shares, and How to Use Them for Investments?
Every day more and more people get interested in investments and the stock market. However, not every investor has a sum substantial for a starting capital. Naturally, you can borrow money from your friends or a bank, but in this case, psychology will work against you, and if you make a mistake, you will have to return the loaned money as well.
Future and beginning investors have a stereotype that they need a serious sum to get started. However, nowadays this idea is not completely fair.
Clearly, a million dollar is more efficient and nicer to invest, but what beginners with a modest capital should do? Here is where fractional shares come to the scene: they let you buy a share even in expensive companies for the money you actually have.
This means you buy a part of a share and become a co-owner of the company. Of course, such a way of shareholding has certain details, and in some cases there is no way to give a voice to a holder of a fractional share, yet there are advantages as well.
Let us find out what fractional shares are and how we use them.
A fractional share is a normal share broken down into several parts. There are several reasons for and goals of such a split and one of them is to give small investors an opportunity to buy a share in the company, driving more money into the company.
The share price of many companies is much more than 1,000 USD, which sifts away a lot of potential investors. This is the problem that stock split is to solve.
- Consolidation of shares is the process of uniting several shares in one. In this case, so-called remainders appear sometimes. They cannot be united in one share for some reasons and turn into fractional shares in the end.
- During additional issue of shares new shares get to the market, and shareholders can buy new shares in proportion to those they already have. In this case, fractional shares can also appear.
- As a result of merger or acquisition of companies fractional shares can also appear. They trade and participate in all other processes as normal shares do, only proportional to their volume.
- Stocks split of a broker: a broker gathers applications from those who want a certain share, buy it when possible, and spreads it between the participants. However, the share itself is kept by the broker, while fractional shareholders own their parts and can sell it to the broker at any moment.
- They give beginners a chance to master investing with a small capital without leverage.
- Investors learn money management with minimal risks. A beginner gets the chance to compose their investment portfolios of assets from different sectors and spheres of the economy and balance out the price of the share by the volume of the position they open.
- Risks are diversified, which means you do not invest all your money in one company.
- You can invest equal sums in different instruments. You can spread equal portions of your capital over a sphere you are interested in regardless of the price of the shares; in other words, you buy parts of shares for the same sum, regardless of their market price.
- They give access to expensive shares. Stocks that cost more than 1,000 USD are unavailable to most investors. When I was writing this article, a share of Amazon.com, Inc. cost 3,428 USD, which means one lot of this share (1 lot = 100 shares) cost 342,800 USD. This is not at all a modest sum. And if you bought fractional shares of Amazon, you could decrease the sum of the deposit two or three times.
- You receive dividends and rewards the same way as with normal shares. You get a proportional sum of dividends to the shares you own, and fractional shares are no exception. There are exceptions when the part of the share is smaller than the minimal currency unit (a cent or a kopeck).
- Commission fees are high while trades are minimal. For example, if you buy a fractional share for 1 USD, the commission fee will be higher than the sum of your trade.
- Not all shares are available as fractional. Certain companies consolidate fractional shares by buying them from investors. This is done for simpler calculations and avoiding troubles with those fractions.
- There can be troubles with closing positions by fractional shares. It is not always possible to quickly find a buyer for a fractional share, this can require time.
As I have mentioned, in certain cases, after a stock split investors have some fractional shares in their portfolios. Then the company just buys those to make the next easier for the investors.
There is nothing supernatural in trading fractional shares. The quotations are the same as with a normal share, and you can use any trading strategy.
For example, you can use fundamental analysis alongside tech analysis. If you invest medium-term and long-term, you will have to study the work of the company carefully and spread the money in the portfolio wisely.
Trading fractional shares imposes the same obligations on you and the same risks as when you trade a share or a pack of shares.
Recently, RoboForex has started to provide fractional shares services at the R StocksTrader terminal, which means wider investment and intraday trading opportunities.
However, keep in mind that the minimal purchase is 1 share, while any bigger volume can be bought in fractional shares.
Invest in American stocks with RoboForex on favorable terms! Real shares can be traded on the R StocksTrader platform from $ 0.0045 per share, with a minimum trading fee of $ 0.25. You can also try your trading skills in the R StocksTrader platform on a demo account, just register on RoboForex.com and open a trading account.