Essential Things to Know Before Buying Fractional Shares

Investing in fractional shares has become increasingly popular, allowing investors to buy portions of expensive stocks that would otherwise be out of their reach. Fractional shares are a game-changer for small investors, giving them the opportunity to diversify their portfolios without needing large amounts of capital. However, before you dive into fractional share investing, it’s important to understand how they work, their pros and cons, and the key considerations to make informed decisions.

Fractional shares are partial shares of a company’s stock. They allow investors to buy less than a full share, meaning they can invest in high-priced stocks with smaller amounts of money. This makes stocks of companies like Amazon, Tesla, and Google more accessible to everyday investors.

• How They Work: Fractional shares are created by brokerage firms or trading platforms. When you buy fractional shares, you own a portion of the stock, and your returns are proportional to the percentage you own.
  

Buying fractional shares is relatively easy. Most online brokers and trading platforms allow investors to purchase them.

• Where to Buy: Platforms like Robinhood, Cash App, and Stockpile are popular for offering fractional shares.
  

• Process: Once you've chosen a broker or platform, you can search for the stock you want to invest in. Simply specify the dollar amount you wish to invest, and the platform will automatically calculate the fraction of a share you will own. Some brokers offer fractional shares for specific stocks, while others allow you to purchase fractional shares of ETFs as well.
  

1. Affordable Access

Fractional shares allow you to invest in high-priced stocks with smaller capital, making it easier for small investors to get started. For example, instead of needing $3,000 to buy a full share of Amazon, you can invest just $100 to own a portion.

2. Diversification

Investing in fractional shares enables investors to diversify their portfolios with smaller amounts of money. You can invest in multiple companies or sectors without needing a large amount of capital.

3. No Need for Full Shares

Fractional shares eliminate the need for full share ownership, allowing you to diversify with a minimal investment. This is particularly helpful if you want to invest in stocks that are traditionally out of reach due to high prices.

1. Limited Availability

Not all stocks are available for fractional shares. Many brokerages restrict which stocks can be purchased in fractions, often limiting it to popular stocks or ETFs.

2. Liquidity Issues

Selling fractional shares may take longer or incur additional costs due to the lower liquidity. You may not always be able to sell your fraction immediately at the price you want.

3. Limited Voting Rights

If you own fractional shares, you may not be entitled to voting rights in the company’s shareholder meetings. This is because fractional shares often do not grant the same privileges as full shares.

1. Fees and Charges

While fractional shares provide access to expensive stocks, it’s important to note the fees involved. Some brokers charge higher transaction fees for fractional share trading. Always compare the cost of trading fractional shares across platforms.

2. Tax Implications

Just like full shares, fractional shares are subject to capital gains tax when sold. If you make a profit on your fractional shares, you will need to report it on your taxes.

3. Broker Selection

It’s crucial to choose a reliable brokerage platform that offers fractional shares. Look for brokers that have low fees, a good selection of stocks, and easy-to-use platforms. Popular options include Robinhood, Charles Schwab, and Fidelity.

Take the example of a stock like Tesla. If Tesla shares are priced at ₹6,000 each, but you only have ₹500 to invest, fractional shares allow you to own a fraction of Tesla’s stock. Over time, as Tesla grows, your fractional investment increases in value, offering the same percentage gains as a full share-holder.

Fractional shares are an excellent way to gain access to expensive stocks with smaller capital. They allow you to diversify your portfolio and make investing more accessible to people with limited funds. However, like any investment, fractional shares come with their own risks, such as liquidity issues and the potential for limited control in shareholder meetings. It’s essential to understand how fractional shares work, consider the fees and tax implications, and choose a suitable platform before making an investment.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.