Fractional share trading

Fractional share trading is a way of investing in stocks that allows you to buy a fraction of a whole share, instead of having to buy a full share at once. This can be useful for investors who want to diversify their portfolio, invest in expensive stocks, or start investing with a small amount of money.

Fractional shares are created when a broker splits a whole share into smaller pieces, usually as low as one cent. The broker then sells these pieces to investors, who can buy as many or as few as they want. The broker keeps track of the ownership and dividends of each fractional share, and allows investors to sell them at any time.

Fractional share trading has some advantages over buying whole shares. For example:

- You can invest in any stock you want, regardless of the price. You don't have to wait until you have enough money to buy a whole share of Amazon, Tesla, or Google. You can buy a fraction of them with as little as $1.

- You can diversify your portfolio more easily. You can buy fractions of many different stocks, instead of having to choose a few that fit your budget. This can reduce your risk and increase your exposure to different sectors and industries.

- You can automate your investing. You can set up a recurring investment plan that buys fractions of your chosen stocks every week, month, or quarter. This can help you build your wealth over time and take advantage of dollar-cost averaging.

 

Fractional share trading also has some drawbacks that you should be aware of. For example:

- You may pay higher fees or commissions. Some brokers charge a fee for each fractional share trade, which can add up if you make many small trades. Other brokers may offer commission-free fractional share trading, but they may make money by selling your order flow to market makers or by charging higher spreads.

- You may have less control over the price and timing of your trades. Some brokers only execute fractional share trades at certain times of the day, or at the end of the day. This means you may not get the best price for your shares, or you may miss out on market movements. Other brokers may execute fractional share trades in real time, but they may use their own prices instead of the market prices.

- You may face tax complications. When you sell fractional shares, you may trigger capital gains or losses that you have to report on your tax return. Depending on how the broker allocates the cost basis of your shares, you may end up paying more or less taxes than if you sold whole shares.

 

Conclusion

Fractional share trading is a convenient and accessible way of investing in stocks, but it is not without risks and costs. Before you start trading fractional shares, you should do your research and compare different brokers and their offerings. You should also have a clear investment goal and strategy, and be prepared to monitor your portfolio and adjust it as needed.