So you’ve been looking into investing, or have just begun your investment journey, but you’ve seen the term fractional shares. This is something really new to the investing markets and is probably the best way you can get involved with investing in 2021 and beyond! So let’s go over a few details and explain what fractional shares are and how they’re used in the investing space.
I Don't Want a Whole Pizza, Do I?
Imagine this, when you go out to buy a pizza you can only buy the whole 16″ stuffed crust regardless of what toppings you have on it, you always need the £15 to buy the whole thing. Now this is typically how investing has worked for forever, and it’s only just started getting tech savvy with new individual investors getting involved in the stock markets like you and me. Now lets take a look at Amazon for example, at the time of writing this article the price for an Amazon stock on the US stock exchange is $3,187.00 exactly. That’s £2,367.71 of the queens finest pound sterling if you purchased a share of Amazon through a provider such as Trading 212. Now remember that we are talking about back in the old days here, so if you wanted to own a part of Amazon you would need the full amount of £2,367.71 to buy 1 whole stock/share of the company.
What If I Only Want a Slice of Pizza?
So you’ve probably guessed it by now, fractional shares allow you to purchase part of a stock/share in a company. This means that you can purchase stocks as a value of currency instead of amount of shares, giving you the freedom to get involved in a company even if you don’t have a whacking £2,300 to spend on 1 share. There are many ways you can buy fractional shares and in all honesty it means that the actual value of the stock or share essentially means nothing now as the price of entry is lowered. Let me explain…
The Stock You Want, at the Price You Choose
Scenario 1: You want to buy a share of Amazon but you don’t want to buy £2,367.71 worth, you can select 0.1 of share which would cost you £236.77.
Scenario 2: You purchase £100 of Amazon which would give you 0.04223 of a share.
You still own a part of the company however you don’t own a full share, what does this mean? If the full share increases in value by 3% then so does your fractional share, but the total gain of the investment is proportional to the investment. A £100 investment with a total stake of 0.04223 would increase the value by £3, now your share of Amazon is worth £103 but your total share amount is still the same at 0.04223 because it has increased in value, not size.
Benefits of Fractional Shares
So what are the up sides of fractional shares? To put it simply it means that you can create your own portfolio of companies and select the percentage that you invest into each so that you get great diversification with monthly investments. You can add 10 companies to a pie/portfolio and have them all at 10% weight meaning that every month you just invest £10 into each company with a monthly £100 investment. It also means that you can get involved with companies without having to invest more than your comfortable with, although you’ll still see the same rise/fall of the full stock.
If you want to see what I mean by this you can check out my dividend investment portfolio/pie in Trading 212 by clicking the link below: