Fractional investing is the buying and selling of partial shares of publicly-listed companies’ stock. Some share prices are too high for smaller investors to access, which is where fractional or dollar-based investing comes into play.
Fractional investing gives investors access when they cannot afford a whole share, by allowing them to invest a lesser dollar amount. It’s the only way some investors could access something like Berkshire Hathaway Class A shares, whose price is more than $500,000.
Fractional shares can also occur as a result of stock splits, dividend reinvestment plans (DRIPs), and other corporate actions.
Investors buy and sell company shares on an exchange, but fractional shares typically cannot be traded this way. Fractional investing is done through select brokerage firms.
In 1999, online brokerage BuyandHold.com first introduced fractional share trading for a low monthly subscription cost. But, like so many dotcom companies, it went bust.
Fractional investing wasn’t really available again until 2017, but several brokerages now allow fractional share trading on certain stocks and funds.
The main disadvantages of fractional investing include trading costs that can sometimes be onerous, limits on when, how, and what can be transacted, as well as liquidity risk, especially when trying to execute sales.
Without strong demand for a stock, it could be hard to find a brokerage firm willing to take the fractional share. Investors might be stuck with that holding for some time, so anyone pursuing fractional investing must be aware of this risk.
Building a diversified portfolio reduces investment risk and fractional shares make enhanced diversification a viable option for more investors. Fractional investing enables more people to gain more varied exposure, including to expensive shares.
While there are risks with fractional share trading, it has helped retail investors access markets that previously had high barriers to entry.