You won’t find many UK companies offering fractional shares – but that’s not to say they don’t exist on our shores. During COVID-19, many people decided to begin their investing journey, using trading apps that gave them the ability to buy shares from countries all over the globe.
That includes the US: home to companies like Tesla whose shares, at the time of writing, were trading at over £200 each. Some investors may not want to – or have the money to – buy shares at that price. That’s where fractional shares come in.
But what are they, and are they worth investing in?
What is a fractional share?
As the name suggests, a fractional share is a portion of a full share. Typically, a broker will buy a full share in a company and then sell fractions of that share to investors.
The dividends and investment returns on these fractional shares are split according to how they’ve been sold.
As well as buying fractional shares through brokers, some investors may find themselves with fractional shares as a result of stock splits caused by mergers or acquisitions.
What are the pros and cons of fractional shares?
One of the key reasons why people choose fractional shares is the ability to own some of the world’s most expensive stocks, even if owning full shares is not financially viable. In this way, it could be possible to invest small amounts of money on a regular basis, with the aim of buying a full share in the business.
It also means that investors can spread their funds across a diverse portfolio in a bid to reduce risk.
However, there are also downsides to fractional investing. Like any investment, share prices can go down as well as up – and some investment providers will also have fairly high minimum investment values which may deter some.
Not every business offers fractional shares as an investment option, so it may not be possible to invest in this way in the company in which you are interested.
The fees charged on fractional shares could potentially also be higher, and you may face difficulties should you want to sell your fractional shares. They will need to be sold back to a broker – and if demand isn’t high enough, you may find that the broker is unwilling to buy.
With shares in companies like Amazon and Alphabet trading at around the £100 mark at the time of writing, fractional shares are a way to invest in a big business in a smaller way, without having to buy entire shares. However, it may not be suitable for every investor – especially given the potential for high fees and difficulties when it comes to selling.
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