Does it Make Sense to Buy Fractional Shares of Stock?
One of the reasons that you purchased stock in the first place was to create some financial security for you and your family. One of the companies you’ve invested is doing well and generating a relatively stable amount of dividends each year. Right now, those dividends are not enough to allow you to buy more shares of stock. Have you thought about seeing if the purchase of fractional shares is possible?
Understanding the Concept
Fractional shares are basically segments or portions of a single share of stock. Instead of purchasing an entire share right now, the investor is able to purchase a part of that one share.
You already do this type of thing with different goods and services. For example, think about your music collection. One of your favorite artists currently has 10 albums in circulation. You can afford to purchase two digital albums right now and anticipate being able to buy the rest in increments of one or two over the next year or so.
While you could save up your money and buy the entire artist collection at one time, choosing to buy a portion of the collection now allows you to enjoy it even as you plan on adding to it until your collection is complete.
Fractional shares work the same way. Instead of waiting until you can purchase an entire share, you purchase a segment and start reaping the benefits of owning that one piece. You don’t have to wait.
Can You Get Fractional Shares Any Time You Want?
Shares of stock are generally bought and sold in full units. That means investors usually must purchase at least one full share of stock at a time. Some companies never offer ways to buy anything less than one share. Others will allow you to buy segments of shares under specific circumstances. There are a couple of scenarios that could allow you to invest in fractional shares.
One has to do with what is known as a stock split. If you already own stock in a company and it’s doing so well that the decision is made to issue more shares, you could have the chance to purchase more stock and end up with less than a full share along with your whole shares.
For example, let’s say you current own 825 shares of XYZ Company. The company announces a share split of 3 for 2. That means for every two shares you own, you have the chance to now own three shares. Choosing to take the company up on the offer, you end up with 1237.5 shares.
Another way to acquire fractional shares is through what is known as a dividend reinvestment plan. Some companies allow their investors to use the dividends on shares of stock they already own to purchase segments or portions of more shares. Little by little, those segments add up to whole shares.
Can Investors Sell Their Fractional Shares?
You already know how to sell full shares of stock, but what about fractional shares? Some brokerage houses will not deal with anything but full shares. Other brokers like Motif or Loyal3 are happy to help clients acquire or sell segments of full shares.
Even if you plan on hanging on to those portions of shares and incrementally accruing enough to make full shares, it helps to know what your broker will and will not do for you.
The day could come when being able to sell all your shares of a specific stock – including any portions of a share – might come in handy.
What’s the Point of Buying Fractional Shares?
The reason you have stock in the first place is to create wealth for you and your family. Wealth translates into financial security. Fractional shares help you add to that security.
One of the benefits of purchasing fractional shares when you can is that the issuing company pays dividends on those segments just like it does on full shares. If you have 6/10 of a share, then you receive a dividend that is based on the 60% of that share you own. You can use those dividends to purchase more fractions or segments, and eventually have full shares that you can sell or hold onto as you see fit.
When you have reason to think the stock offered by a certain company is going to be worth a lot more in a few years, it does make sense to buy as many shares as you can. Maybe you have a thousand dollars that you can set aside for the purchase, but that figure would only allow you to purchase 20 shares and leave you with $100.00 left over.
Instead of settling for the 20 shares, find out if you can portion a part of a share. If the stock does increase in value the way you think that it will, that portion of a share will mean more money for you in the long run.
This investment strategy is also a great way to build an investment portfolio when you can only afford to set aside lower amounts every month to buy stock. Instead of settling for a stock that is priced lower per share and is less likely to generate any dividends, you purchase partial shares of stocks that are projected to do well in the years ahead.
Little by little, you keep purchasing more segments and eventually own full shares. Gradually acquiring assets that perform well and generate more income for you is a much better choice than buying full shares today that will never perform as well.
Talk with a broker today and learn more about fractional shares. Consider what they could do in terms of helping you build the financial security you want. After trying this approach one time and seeing the results, you will find this approach to purchasing shares is something you want to do on a regular basis.