A Crash Course in Buying “Part” of a Stock
New to the Stock Market? All of us were at one point or another. Most Americans still are. It all just seems so intimidating. And expensive.
Few people new to investing know about or understand fractional shares, even though they’ve understood fractions since around the fourth grade. Most of us grew up understanding only that a share cost a certain price and that’s the price we pay to purchase that investment.
That kind of thinking has kept many people away from entering the market in the first place. Sure, there have always been affordable shares of affordable companies, but even then, investors had to commit to buying shares in lump sums. So, when you bought Acme shares at $15 per share and saw a good return, watching the stock climb to $45 per share, it was all the more costly to buy more, shutting many people out of a growth opportunity. If that stock price soared to $145 or $245 per share, it was simply out of reach altogether.
Where I might not be able to lay down $500 for a single share of Acme, I can pay $50 to get part of a share.
Amazon is a perfect example of that type of growth.
Back in 1997, the little online book retailer made its IPO at a mere $18 per share. Plenty of people could afford to by a single share at that price. Or even ten shares. There are lots and lots of people who might be willing to risk losing $180 on the upstart web-based retailer. There are precious few people who can buy shares of Amazon today. The closing price on Feb 9, 2020 rests at $3,305 for a single share of the behemoth that made Bezos America’s first trillionaire. Most Americans don’t take home $3k in a paycheck, so there’s no way they can risk it on a stock buy.
Therein lies the gift of fractional shares. The sooner we come to understand — and embrace — them, the better.
Fractional shares are just that: fractions of, instead of whole shares, in a company’s stock. Where I might not be able to lay down $500 for a single share of Acme, I can pay $50 to get part of a share, and that allows me to ride the coattails of an otherwise expensive company.
These come in what are known as ETFs, or Exchange-Traded-Funds, so what’s happening is that, in the Acme example, I am bundling my $50 with ten other investors who also have $50, and we each get a fraction of that share. Acme still sells a single share, and everyone is happy.
These shares are sold through a number of brokerage firms, so it’s likely that you already have a relationship with one through your job and its 401k or other investment vehicle, but if you don’t, there are plenty you can trust. The most popular include Fidelity, Betterment, Ellevest, Stash, and more. All of them have easy to learn and use online tools so you can avoid those awkward conversations in a brokerage office. You can set up accounts all on your own, online, in your pajamas, or on your phone, or during your lunch break.
I will never have to wait until I have $3,305 saved up to buy a piece of Amazon. I can get a little slice whenever I want.
One of the biggest benefits of Fractional Investing is, as I see it, the ability to make it a regular habit. For years, I was the type of saver who put $10 in a jar every week, then I became the type who stashed $20 every paycheck in my savings account. As my salary grew, and I learned rules like “pay yourself first,” (a rule I have never strayed from), I wanted to invest in the market but didn’t have the tools other than my company-sponsored 401k. I was intimidated by the thought of sitting down with a broker, and stocks seemed too expensive.
But now, I use that old every-paycheck savings strategy to put me ahead in the investment arena. I move a fixed amount each week into my ETF-fund, and I don’t even miss it. Every now and then, if my finances feel especially flush, I move even more in. Thanks to fractional shares, what I am doing now is what’s known as “dollar-cost averaging.” All that means really is that I get to invest the full amount that I deposit into that account every month in stocks, instead of waiting until I have enough to buy a full share of something. If I deposit $50, I get $50 worth of shares. If I deposit $225, I get $225 worth of shares. I will never have to wait until I have $3,305 saved up to buy a piece of Amazon. I can get a little slice whenever I want.
Buying Fractional Shares is not without its pitfalls, like any investment, but they are few. I’m still investing for the long term (always a fan of time in the market). Moving to a new brokerage firm is a little tricky if you have fractions of shares, because those fractions usually have to be sold instead of transferred. It’s difficult to transport 1/18 of a Microsoft share. Instead, those need to be sold and transferred as cash. Plan for that movement if you plan to switch to a different program or broker.
Other than that, it’s difficult to discern a downside to buying fractional shares that is any different from the downside to buying stocks in general. As long as you are prepared to learn, be patient with market fluctuations, and watch things grow over time, all will be well.