Tesla, Apple, Amazon, Toyota, Honda, or Alibaba: What do these companies have in common?

They are global leaders in their respective fields.

It’s no wonder if you want to add these stocks in your investment portfolio.

The shares of Amazon alone have witnessed 5x growth in the last five years.

However, most retail investors may find it slightly expensive to buy individual shares of these global leaders.

At the time of writing this post, Amazon was trading at over 360,800ksh ($3,319), whereas Tesla was trading at 48,270ksh ($444).

Fractional shares allow retail investors to purchase a small fraction of these shares, which means you don’t need a huge investment to add the top global companies to your investment portfolio.

We have created this guide to help you understand how fractional shares work, their benefits, and whether they are suitable for you or not.

Let’s get started!

As the word sounds, fractional shares are smaller portions of a share. It isn’t uncommon to find a share split into two decimal points or even small fractions.

What a fractional share does is that it allows new investors to own a small portion of a share.

For instance, instead of purchasing 1 full share of Apple, you can buy a 0.1 or 1/10th part of a share.

Fractional shares provide the flexibility to invest as much as you want in a company instead of having to invest the minimum share price.

Fractional shares have the potential to democratize stock markets. People who never had access to expensive or highly-priced shares can start investing in the top companies.

If you want to invest through fractional shares, here is what you need to do.

● Choose a brokerage with fractional shares feature. Since fractional shares have grown in popularity in recent years, your current broker may not offer fractional share trading. Choose a brokerage that charges nominal transaction fees and lower commissions, along with timely settlements.

● Identify if you need to place a special request or activation for fractional shares. Find out if you need to put a special request for trading fractional shares.

● Develop a stock watchlist with shares of companies that you would like to trade. Make sure you diversify across industries, sectors and locations to mitigate risks.

● Start trading fractional shares. Ideally, you should be able to input the amount you want to invest in a particular share. Your broker will calculate the equivalent fractional share and process the trade. When the market meets your strategy conditions, calculate your risk amount, trade size and execute your trades.

● Access to top companies: One of the primary benefits of investing in fractional shares is that you will get access to some of the leading companies for a small ticket price instead of having to purchase a full share. You don’t have to compromise on what shares you want to add in your investment portfolio.

● Only invest amounts that you’re comfortable with: If you’re a new investor, you may want to add multiple investments to your portfolio. Adding the share of a top company in your portfolio may eat away all of your available funds, leaving nothing for other investments.

Fractional shares allow you to invest only the amount that you are comfortable with or want to invest.

● Greater portfolio diversity: Diversification helps retail investors minimize their portfolio risk by distributing their investments across different sectors, markets, and asset classes. Fractional shares provide you with an opportunity to diversify your portfolio with global investments. You can create a portfolio comprising of some of the top stocks from leading economies of the world.

● Brokerages get a higher customer base: By offering fractional shares to investors, brokerages can scale their user base. Brokerages can target under served customer segments to develop new revenue streams.

● Higher trading or transaction charges: Since fractional trading allows inventors to accumulate fractional shares of companies, they are highly likely to trade frequently.

This, in return, could inflate their overall transaction fees or commission charges. You have to be cautious about limiting the number of trades.

● Limited brokerages offer fractional shares: Not all the brokerages provide fractional share investing, so you may have to open a new account and pay setup fees.

● Loss of fractional dividend: If you own fractional shares, you may end up losing a part of your dividend. Imagine if own a 0.1 share of a company that announces a dividend of 5ksh per share.

Since you own 10% of a share, your dividend comes out to be 0.50ksh. Several exchanges follow a practice of leaving out fractional dividends (less than 1ksh), leaving you with no dividend income.

The ability to invest in some of the best global companies sounds exciting, but that doesn’t mean that you should purchase any share without proper analysis.

Trading and investing in fractional shares follow the same investment principles.

You have to make sure that you understand the fundamentals of the company, its recent growth, and financial projections.

Additionally, purchasing fractional shares could incur higher transaction charges (as you may buy shares multiple times), which makes it suitable for long-term investing only.

If you’re planning to create a portfolio for long-term growth, fractional shares are ideal for you.

If you’re investing for dividend income, fractional shares may not be a suitable match for your portfolio.