Fractional shares in trading: what are and how to use them

Trading requires access to financial markets for investors who want to benefit from investment opportunities. However, traditionally, whole share purchase could be a barrier to investors with limited financial resources. Fortunately, with the advent of fractional shares, this barrier has been broken down, opening up new opportunities for investors of all levels.

What is a fractional share (FS) in trading?

A fractional share (FS) represents a fraction of a full share. Instead of investing in an entire stock, investors can invest in a smaller portion of it. For example, if the price of a share is $1000, an investor can invest in a fraction, such as a tenth of a share, at a price of $100.

Fractional shares have become possible thanks to technology and online trading platforms. These platforms, such as xStation - an award-winning platform with superior execution speed - allow investors to buy and sell fractional shares easily and conveniently. The investor can specify the amount of money he wishes to invest and the platform will automatically calculate the fraction of a share corresponding to the desired value.

How do fractional shares (FS) work?

But how exactly do fractional shares work? Essentially, when you place an order for a fractional share, your broker buys the full share. Next, it splits that share among investors who want a fraction and records that split in its records.

Please note that fractional shares are not direct investments in stocks/ETFs. Buying fractional shares is not the same as buying fractional shares of company stock: Fractional shares allow you to acquire a fiduciary right to fractional shares (it is an indirect security). The only thing in common is that the client receives the dividend in proportion to the allotted share.

Why have fractional shares become popular?

Fractional stocks have gained popularity for several reasons, including:

• Accessibility: Fractional shares have broken down the barrier to access to financial markets. Investors with limited financial resources can now participate in trading shares of prestigious companies even with small starting capital. They no longer have to wait to build up enough cash to buy a full share but can start investing in smaller amounts.

• Portfolio Diversification: Buying fractional shares allows investors to diversify their portfolios. They can invest in a range of companies from different industries without buying full shares. This reduces the risk associated with a single stock and allows investors to take advantage of market opportunities more broadly.

• Recurring Investments: Fractional shares make it easier for investors to make recurring investments. They can schedule regular fractional stock purchases based on their financial possibilities. This promotes investment discipline and allows you to build up a position over time.

• Removing Price Restrictions: Established companies can have high share prices that may be out of reach for some investors. Fractional stocks overcome this limitation by allowing investors to participate in the opportunities offered by high-value stock companies without having to invest a substantial amount.

• Learning and Experimenting: Fractional stocks offer investors the ability to learn and experiment without putting large sums of money at risk. They can test different trading strategies and gain experience without significant investments. This can be especially useful for beginners looking to learn the stock market dynamics.

• Holding in high-value stocks: Some shares in successful companies can reach very substantial values, making it difficult for many investors to buy a significant amount. Fractional shares allow investors to participate in high-value stocks’ opportunities without having to own a full share.

• Improved Liquidity: The introduction of fractional shares has also helped improve the liquidity of the stock market. The more investors that can participate in stock trading, the higher the transaction volume. This leads to a more liquid market, where investors can buy and sell shares faster and more smoothly.

Split shares challenges and considerations

While fractional stocks offer many benefits, there are also some challenges and considerations investors should be aware of:

• Trading Fees: Some trading platforms may charge fees for buying or selling fractional shares. These fees may affect your overall investment returns, especially if you frequently trade small fractions.

• Difficulty choosing fractions: Buying fractional shares requires a decision on which fraction to invest in. Investors should carefully consider the amount of money they wish to invest in and calculate the corresponding fraction. This requires some planning and careful consideration of the options available.

• Voting Restrictions and Shareholder Rights: In some cases, investors who hold fractional shares may not have full voting rights or other shareholder rights. Companies can impose limitations based on the fraction of shares they hold. Investors should pay attention to fractional shares’ rights before making an investment.

• Potential Reduced Liquidity: While fractional shares have helped improve overall market liquidity, some fractional shares may have lower liquidity than whole shares. This may result in decreased availability of buyers and sellers for certain fractional shares, which may affect the speed of order execution and your ability to sell or buy fractional shares in a timely manner.

• Return Tracking: Buying fractional shares can make it a bit difficult to track the returns of your portfolio. Because you own fractional shares of several companies, it’s important to track the individual performance of each fraction to evaluate the overall return on your investment.

Are fractional shares right for you?

In conclusion, the introduction of fractional stock trading has revolutionized the accessibility and opportunity for investors to participate in the stock market. It is important to have a thorough understanding of market dynamics and a well-defined investment strategy to take full advantage of this opportunity. Choosing an established and globally awarded financial broker can help you in your investment education and management.

Original article published on Money.it Italy 2023-06-14 15:23:00. Original title: Azioni frazionate nel trading: cosa sono e come investire