It seems like a great idea in theory: break up your shares of a company and sell them off in small pieces to more people, but are fractional shares bad or good?
Fractional shares allow you to get into the stock market without having to spend a fortune, and you don't need to be an expert on stocks to make money.
Unfortunately, this is not always the case in reality. There are several drawbacks to fractional shares that investors should be aware of before they decide whether or not to invest this way.
In this article, we will discuss some of the most important ones.
Drawback #1 - Lower Liquidity
One of the biggest problems with fractional shares is that they are not as liquid as full shares. This means that it can be difficult to find someone willing to buy them from you, and you may have to accept a lower price than you would for a full share.
This is a disadvantage because it means that you may not be able to get your money out as quickly as you want, or that you could lose money if the stock price falls before you can sell. With lower liquidity, there is also a greater chance that the price of the fractional shares will be more volatile, meaning it will go up and down more frequently.
Drawback #2 - Higher Fees
Another issue is that fees are often higher for fractional shares than they are for full shares. This is because brokers typically charge a commission on each trade, and these commissions can add up quickly if you're buying and selling multiple fractional shares.
A few percentages may not seem like much, but it can eat into your profits if you're not careful. For example, let's say you buy 0.1 of a share 10 times over a month and are charged a $1 commission each time. That's a total of $10 in commissions, just to buy one share.
Compared to saving up and buying it at once for just $1 in commission for the single buy order for the same amount of share ownership.
Drawback #3 - Limited Voting Rights
Fractional shares often come with limited voting rights. This means that you may not have a say in important company decisions, such as who is on the board of directors. This can be a major downside for investors who want to have a say in how their companies are run.
Some investors may not care about their voting rights but large investors with a significant amount of money invested in a company may want more control. If a company you know has the potential to do great things, but you don't like the way it's being run, then owning fractional shares may not be the best idea.
Drawback #4 - Risk of Fraud
Fractional shares also come with the risk of fraud. Since they are not as well-regulated as full shares, there is a greater chance that you could be scammed. For example, someone could sell you fake fractional shares or convince you to invest in a company that doesn't actually exist. Before you invest in fractional shares, make sure you do your research and only work with reputable brokers. This will help you avoid any potential scams and protect your investment.
Drawback #5 - May Not Be Worth The Effort
With fractional shares, you can invest just pennies into a company, but is it worth the effort? For some people, the answer may be yes. But for others, it may not be worth their time and energy to invest such a small amount of money.
Over diversifying your portfolio with fractional shares could lead to more work for you in the long run. You may have to keep track of dozens or even hundreds of different stocks, which can be time-consuming. If you end up diversifying with fractional shares, you may have been better off with an index fund (exchange-traded fund).
You may also find that the company you want to invest in doesn't offer fractional shares. In this case, you would have to either buy a full share or find another company that does offer them.
Are there any downsides to fractional shares?
Unfortunately, there are several drawbacks to fractional shares that investors should be aware of.
First, fractional shares can lead to increased market volatility. This is because when more investors can trade smaller amounts of stock, the market becomes more sensitive to changes in supply and demand.
Second, fractional shares can make it more difficult to track your investment performance. This is because you will now have more positions in your portfolio, and it can be tough to keep track of how each one is performing.
Third, fractional shares can also create tax complications. This is because the IRS may treat each fraction as separate security, which can lead to a higher tax bill.
Finally, fractional shares are often not available for all stocks. This means that you could miss out on investing in some of your favorite companies.
Overall, while fractional shares can offer some benefits, there are also several drawbacks that investors should be aware of before they begin trading them. If you're thinking about investing in fractional shares, be sure to do your research and understand the potential risks involved.
Overall, fractional shares can be a great way to get started in the stock market without breaking the bank. However, there are some drawbacks that you should be aware of before investing in fractional shares. Especially when comparing them with whole shares.
Investors should carefully consider these drawbacks before deciding to invest in fractional shares. While they may seem like a good way to get started in the stock market, there are potential problems that could offset any benefits