In the second half of May 2022, video game maker Electronic Arts (EA -0.35%) rallied from less than $112 per share to eclipse $138 per share. The company, known to gamers and sports fans as EA Sports, recently reported double-digit growth in annual net bookings and its player network.
EA’s $135 to $140 price point isn’t too intimidating — especially compared to high-priced stocks like AutoZone and Chipotle Mexican Grill. Those two positions trade above $2,000 and $1,360, respectively. Still, if you’re just starting your investing journey, you might not want to drop this week’s entire investment budget on a single stock — no matter how much you love playing FIFA 22.
Fortunately, there’s a way to own EA stock for far less than $140.
Enter fractional investing
Fractional investing is the practice of buying stock shares in units of less than one. Depending on your broker’s rules, you can buy a position as small as one-millionth of one share, and in that case, your price on that position will be one-millionth of the stock’s share price.
With respect to EA, you could spend $1 to buy about 0.007 shares. Your fractional shares would rise and fall in value, just as a whole share of stock would.
The drawbacks of fractional investing
So you can buy stocks for the price of change you find in the couch. What’s the catch? Well, there are a few.
Here are four drawbacks to fractional investing. These could be minor or major issues, depending on your investing practices.
- Fractional shares may be less flexible than whole shares. Fractional investing is made possible by your broker — not the stock exchanges. That’s significant because it means your broker defines the transferability and settlement rules. Often, you cannot transfer fractional shares to another account. You’d have to sell them and then transfer the cash. And some brokers take longer or charge extra fees to process sales of fractional shares.
- The fees on fractional investing can get pricey. When you’re making very small stock buys, trading fees will consume a high percentage of your investing budget. Fortunately, there are brokers that don’t charge fees on fractional transactions.
- You may miss out on dividends. Fractional shares pay fractional dividends. Say you own half a share of EA. In that case, you’d earn half of EA’s $0.19 quarterly dividend — which works out to $0.095. Your broker will decide whether to round that amount up or down to the nearest whole penny. Note that if your pro rata share of the dividend is less than one penny, you might not be paid anything at all.
- Your taxes can get messy. The usual tax rules apply to fractional investing. You’d owe taxes on dividends and realized gains. If you’re trading often, you may have to parse through a lot of detail to sort out your tax bill at year end.
How to get started in fractional investing
Drawbacks aside, fractional investing is a straightforward way to invest on the smallest of budgets. Not only can you own (fractions of) very expensive stocks, you can also diversify into 10 or 20 positions with as little as $20.
To get started with fractional investing, find a suitable broker. Some options here include Fidelity, Charles Schwab, M1 Finance, Betterment, Robinhood, and SoFi Invest.
Carefully review each broker’s terms. Specific points to compare are:
- Fees for buying and selling
- Handling of dividends
- Settlement time
- Minimum trade amount
- Positions available for fractional purchases
- Handling of shareholder voting rights
- Automations — ability to set up recurring investments
Once you pick your broker, you’ll fund your account, plan your investment approach, and start trading.
From fractions to whole numbers
Fractional investing might be your entry point into investing, but it’s not your endgame. Evolve your portfolio into whole share positions by investing regularly and raising your budget often. Stay the course, and soon you could be measuring your wealth in thousands of dollars rather than pennies.
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