Daniel X. Bustamante, Co-Founder and Lead Coach
The markets today are ever-evolving. Many brokerage houses are reducing some trading commissions to zero. Some are offering debit cards for your brokerage account. We are seeing new products and features released all the time. One of those products are ‘Fractional Shares’. I am going to discuss what they are and also provide some personal insights to them in this article today.
So usually we are used to purchasing say 5 shares of a stock or 1 share of a stock. But what if that stock is too expensive yet we want to own it? Take Amazon for example. At the time of writing this it’s a $3,000 + stock. With these fractional shares you can invest in certain stocks or ETFs that you may like at a ‘fraction’ of the price.
Just like normal stocks you can buy and sell them on most platforms. Companies like Robinhood offer fractional shares and as of recently Charles Schwab released “Schwab Stock Slices”.
(image courtesy of Charles Schwab & Co., Inc)
The above image is a good example of how it works. For some, using this can be beneficial because:
- You can diversify your holdings
- You can mitigate risk
- You may have a smaller nest egg to begin with
Where can you buy fractional shares?
These days, major brokerages offer this service of fractional shares:
Again, this is now a pretty mainstream idea and most of them are going to offer this service. Some, as you see above with SoFi, only offer a certain amount of eligible equities to trade fractional shares on.
It is important to remember: Not all companies have the ability to use fractional shares, but they may have options which I discuss below.
Start Small & Learn
For me, I really like this concept and the overall democratization of finance. What this does, in my view, is allow people to get involved. You are more likely to pay attention to the markets, companies you invest in and learn when you have actual dollars invested.
So this idea of fractional shares letting you put skin in the game and beginning to learn with small risk is a good one. With slices of stock, you can really put small amounts of money to work.
Now the catch is not all companies offer fractional shares but that’s alright. The idea here is to begin investing in the markets with small dollar amounts. For me, when I turned 18 I was lucky enough to receive a brokerage account my grandparents set up for me with a few stocks that had been in there forever. For me, that was ‘the trigger’ to start learning. I recall researching as much as I could trying to put it all together whatever way I could. But because I had this portfolio it got me to that point.
Fractional shares can do just that, for you as well, if you take that viewpoint on how to use them. There is the argument that they allow you to diversify a bit and manage risk. For that, I have to push back a bit.
I don’t think it’s a secret that I am a big fan of equity options trading. They present a lot of advantages for the markets and the participants in said markets. One of those is allowing those to purchase the ability to buy or sell a company at a later day with call options.
Using LEAPs instead of Fractional Shares
Last week, I taught our WealthAbilities course. One of the concepts that I discussed in class is the use of LEAP options trading. See, if we are going to take the perspective that fractional shares allow you to participate in owning stock let me show you LEAPs, instead. Without going into a full lesson on how LEAPs work let me just say a few bullet points.
- LEAPs allow you to bet on the price of stock going higher or lower 12 + months in time
- They are a fraction of the price of owning the shares
- Your max loss is known
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So getting back to fractional shares, yes, I do like them for certain purposes. They are great for beginners. They do help get people interested in trading and investing, and they do diversify risk for smaller accounts.
However, I think once someone gets past the beginner phase, that they can step up to other means of risk management and controlling shares of more ‘expensive’ companies through certain options trading strategies.
Thanks for reading this week’s article and I hope to see you in one of our complimentary webinars!
Daniel X. Bustamante