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What are fractional shares, and how do they work?

Updated: May 24

Want to invest in big name stocks but can’t afford to take out a huge chunk of your savings to do so? Then you might be interested in fractional shares. Fractional shares allow you to purchase pricey stocks and ETFs for less. They offer the same benefits as whole shares, including the right to receive a proportion of any dividends per share that may be paid by the company. This might be a great option if you’re a beginner investor looking to dip your toes into investing or if you’re a trader looking to diversify your portfolio without investing all your savings in a single company.


In this article, you’ll learn about fractional shares, how they work, and how you can get started on fractional trading. Let’s dive in!


What are fractional shares? 

Fractional shares are parts of a whole share of a company's stock. Instead of buying an entire share, you can purchase just a portion of it, allowing you to invest smaller amounts in high-priced stocks.


Think of a whole share as a pizza. Instead of buying the whole pizza, you can buy just one or two slices. Similarly, with fractional shares, if a full share costs $100, you can invest $20 and own a fraction of that share. This way, you can start investing with smaller amounts and still own a piece of high-value stock.


pizza cut into slices to illustrate fractional shares


Real-Life Example: Apple Stock Split

Let's use a real-life example with Apple. In August 2020, Apple announced a four-for-one stock split. Before the split, if you owned 1 share of Apple worth $400, after the split, you would own 4 shares, each worth $100. Despite the split, the total value of your Apple stock remains unchanged ($400), but you now hold more shares, each priced lower.


For fractional shares, if you owned half an Apple share worth $200 prior to the split, you would now own one share worth $50 each. The overall value of your holdings remains $200. This makes investing more accessible, allowing you to own a portion of high-priced stocks without spending a large sum of money upfront.


The Pros of Fractional shares

Lower Entry Barrier

Fractional share trading lets you invest in small sums of money, which makes it a great option for beginner investors looking to start their investment journey without forking out a large investment upfront. This will help you get into the market sooner and start benefiting from compounding returns.


Do More with Less

With fractional shares, you can diversify your portfolio and spread your investments across a broader range of assets. Diversifying your portfolio is a fundamental principle in building a robust portfolio to mitigate your risk of losses if one of your shares starts to dip. Fractional investing allows you to invest in multiple shares, often for as little as $1 to $5 each. Essentially, even with a small investment, you will have a wider range of stocks than you might otherwise have.


Monthly Investing 

Fractional trading is ideal for monthly investing because you can start investing without the need to commit larger sums of money upfront. This makes it easier to stick to a consistent investment strategy over time.


Dollar-cost Averaging

Fractional shares allow you to take advantage of dollar-cost averaging. Dollar-cost averaging lets you invest a set amount of money at regular intervals, regardless of the stock's price at the time. You invest the same amount regularly, which helps you buy more shares when they're cheap and fewer when they're expensive. Fractional shares make this easier because you can always invest your full amount, even if you can't afford a whole share. This helps you save money over time and makes your investing smoother in the long run.


The Cons of Fractional Shares

Limited Availability 

Not all stocks or ETFs are available for fractional trading, so it’s best that you do your research depending on which investment platform you’re trading on. 

No Voting Rights 

Fractional shares might not come with the same stock ownership privileges as whole shares, such as voting rights in shareholder meetings. This means you may not have a say in company decisions, unlike whole share owners.


Liquidity 

Selling fractional shares may take longer compared to whole shares, as fractional shares don’t trade as frequently. This could potentially impact your ability to exit positions quickly, especially during times of market volatility.


Psychological Impact

While fractional shares make investing more accessible, it's essential to be mindful of overimpulsive decisions. Just because a stock is affordable doesn't necessarily mean it's a good investment. The relatively small investment amounts may lead to hasty decisions, which could accumulate over time and affect your overall investment performance.


Where Can I Buy Fractional Shares? 

There are plenty of brokers that offer fractional share trading. moomoo has recently rolled out its fractional trading feature. With moomoo, you can buy or sell fractions of stock and ETFs starting from as little as $5 or a minimum order size of 0.0001 share.


However, it's worth noting that fractional trading on moomoo is currently available only for certain US stocks and ETFs.


moomoo offers fractional share trading with 0% commission fees. This means you can trade fractional shares without incurring additional costs such as settlement fees, SEC fees, or trading activity fees. So, you can enjoy the freedom to invest in fractional shares of your favourite stocks and ETFs without worrying about extra charges.


moomoo promo zero commission for fractional share trading

How to Buy Fractional Shares 

If you are new to investing and want to start with fractional shares, look for a broker that provides fractional share trading. moomoo, for example, is an excellent investment platform for beginners that makes trading fast, simple, and accessible. Here’s how you can get started:


1. Research and Choose Your Stocks

Take some time to research the stocks or ETFs you’re interested in. Look for companies with strong performance histories or those in industries you believe in. Consider reading up on their financial health, market position, and future prospects. You can use the “Industrial Chains” feature on the moomoo app to get a comprehensive understanding of popular industries and related stocks. To access it, click on the Market tab, then navigate to US > Industrial Chain.


2. Open an Investment Account 

Not all brokerage platforms support fractional shares, so choose one that does. If you haven’t already, you can open your investment account here


3. Deposit Funds

After your account is set up, deposit funds into your investment account. Fund deposits typically take a few business days to process, but moomoo's FPX Express Deposit feature allows you to transfer funds in as little as 5 minutes. 

4. Start Buying Fractional Shares

Navigate to the Markets tab on the moomoo app and ensure you’re on the US Market section. Then, tap on Fractional Shares to see the list of available stocks. Decide how much money you want to invest, whether it’s $5 or a higher amount, and place your order.


screenshot of fractional share feature on moomoo app


5. Monitor Your Investments

Following your fractional share purchase, monitor your assets, evaluate your returns, stay up to date on market developments, and make any necessary portfolio adjustments.


Conclusion 

Buying fractional shares makes trading more accessible to new investors and traders alike, as it allows them to enter the market with a lower entry barrier to become familiar with investing and to diversify their portfolios without requiring substantial capital. 


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