If you are looking to start your investing journey, and you do not have a lot of funds, or you want to start small you may wonder if fractional shares are risky. Are they riskier than whole shares?
Fractional shares are pretty much the same as whole shares, however, they have some disadvantages and some advantages.
Is there a downside to owning fractional shares?
Yes, there are some downsides to owning fractional shares. Here are the main disadvantages of fractional shares vs whole shares:
- Less liquidity
- Higher fees
Why fractional shares are harder to sell
The main disadvantage of owning fractional shares is that the liquidity is lower than whole shares. Therefore, it takes more time to get orders executed. Buying and selling fractional shares requires a counterparty that is willing to buy or sell the same amount. This results in orders taking a lot more time to be executed and filled.
In a situation where the market is declining, and you are trying to sell your fractional shares, the stock price may continue to decline while you try to get your order executed.
Another disadvantage is the fact that your broker might still charge high fees for each trade. Therefore you may end up paying a large fee on each of your trades. This is accentuated if you trade often.
Lastly, if you invest in fractional shares, you may not get your dividend. For example, if you 10% of a stock that is trading at $1 and it pays a $0.01 dividend, you would be entitled to 10% of $0.01. Since there is no way to credit this amount on your brokerage account, and you might even be charged a fee to receive dividends you may not actually get the dividend.
Are fractional shares a good idea?
Fractional shares are a great instrument for investors that do not have a lot of capital to deploy and want to invest for the long term. They are also useful if you want to invest a certain amount of dollars every once in a while, or if you follow a dollar-cost averaging strategy.
Due to its main disadvantages, fractional shares should not be used if you want to trade frequently. The reduced liquidity will make it difficult to fill orders, and you may not get the execution you hope for.
Can you get rich from fractional shares?
It depends on how much you invest. If you invest frequently and decide to invest a good chunk of your savings into fractional shares then you can certainly make some money. However, in order to get truly rich, you would have to buy whole shares. Otherwise, your portfolio will be too small to actually generate sizeable returns.
Are fractional shares worth it?
Yes, fractional shares are a great way for investors to start investing with very little money. It allows them to get acquainted with the stock market, and begin their investing journey. It is also a useful way to start investing regularly.
Another advantage is that investors that are unable to buy a share because the stock price is too high, are able to buy a fixed amount of dollars of that same stock. Overall being able to buy in dollars vs shares allows every investor access to the stock market, whether they have a lot of money to invest or not.
Due to how fractional shares work, they can be risky compared to traditional whole shares. For those reasons, investors should be aware of the possible downsides of owning them. Despite the disadvantages, there are clear benefits associated with fractional shares.
If you are thinking of starting your investment journey, fractional shares can be a great way to give you access to the markets.
Image source: Bernard