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Fractional Shares

Opening up the world of stock investing

Our Two Cents

If you believe it takes a lot of money to get started investing, think again. Fractional shares can allow you to get invested sooner rather than later. This is important because time is one of your greatest assets when it comes to investing, and waiting to invest can be costly. By investing even small amounts—early and consistently—you have the potential to get the wheels of compound growth working for you.

So what's a fractional share? It's a portion of a share of stock, which helps remove high stock prices as a barrier to investing. Anyone can invest with just a few dollars.

Here are a few basics on how fractional shares can help you—or someone else—get started investing.

Whole shares not required (you can now buy just a piece)

In the past, investing in a company meant buying at least one share. This could put shares that ran in the hundreds or thousands of dollars out of reach for some people. It also meant you had to figure out how many shares of stock you could purchase with, say $100 or $1,000 since you couldn't buy a fraction of a stock.

Fractional shares fill this gap, allowing investors to buy (and sell) pieces or "fractions" of a single share of a single company or several companies.

With fractional shares, for example, investors could buy a fraction of a share of a company for $5, or potentially buy a small group or "bundle" of 10 companies for $50—regardless if share prices were in the hundreds or thousands of dollars. By buying in fractions, if a company's stock is selling at $1,000 a share and you invest $200, you would own a 20 percent fraction or, put differently, a 20 percent "slice" of a share. As an owner, you would potentially also be eligible to receive 20 percent of any dividend payments.

The types of securities you can buy in fractions and specific investment minimums will vary depending on the brokerage firm you invest with.  But in general, here are some additional benefits:

1.You can customize

Investing in individual stocks or bonds isn't for everyone. But for investors who want to customize their investment strategy, fractional shares can be a way to build a stock portfolio based on personal preferences.

For example, you might choose to invest in a specific technology, consumer good, or media company. Or you could choose to invest in specific companies in certain sectors of the economy like environmental sciences, real estate, or health sciences. With fractional shares you can mix and match investments based on your goals and interests.

2. You can diversify

Diversification—or spreading your investments across a large number and variety of investments—is a powerful way to mitigate risk and a bedrock of successful investing.

In addition to ETFs and mutual funds, fractional shares allow investors to purchase a small amount of many securities, spreading out their risk. With mutual funds and fractional shares you can put small cash balances to work rather than having to save up to buy a whole share. Unlike mutual funds and ETFs however, fractional shares allow investors to buy a portion of a single security.

Because of these considerations, low cost, diversified mutual funds and ETFs are great core holdings for the majority of investors. Investing in individual securities—including fractional shares—can be a way to further customize your portfolio to your situation and investment preferences.

OUR TWO CENTS

Be careful about taking on too much risk by investing all of your money in just a few stocks. As a general guideline, you should avoid having more than 10 percent of your stock portfolio in one individual stock.

3. You can gain experience

Investing in the stock market can be intimidating, especially when you're getting started. Owning even a few dollars of a company can open up doors to the world of investing. Tangible ownership can make investing lessons come alive and spark interest in everything from math to understanding how businesses and the economy work.

Building financial literacy goes beyond knowing facts and figures about money. The lessons learned by experiential learning—learning by doing—can be powerful and long lasting.

Low stakes practice—including learning from mistakes—can help novice investors understand not only the mechanics of investing, but provide opportunities to critically self-examine their strategies, behaviors, and their ability to deal with market volatility. All of these are foundational elements of successful investing.

4. You can strategize

Fractional shares lend themselves to several powerful investing strategies.

The first strategy is what we call "core and explore." The core, or foundation, of your portfolio can be constructed of a globally diversified mix of low-cost mutual funds. You can then use fractional shares to ‘explore,' or complement this foundation with a mix of selected individual stocks.

Fractional shares can also be a good way to implement another strategy called "dollar cost averaging." With dollar-cost averaging, you invest a set amount of money at a regular interval (perhaps monthly) – regardless of how the stock market is performing. Because you're investing in both up and down markets, you essentially buy more shares when the market is low and fewer when the market is high. This can have the effect of smoothing out market volatility and mitigating your risk.

You might also want to consider using fractional shares if you do a fair amount of trading in tax-advantaged accounts like Coverdell, Traditional or Roth IRAs. Tax reporting is simplified since there are no tax consequences for trading inside of these types of accounts.

5. You can gift

Whether you're trying to improve someone's financial literacy or pique their interest in investing, fractional shares can be an effective way to open up conversations about how investing works and how it can build long-term wealth.

You might consider making a gift through a custodial account of a specific dollar amount ($5, $25, $100) to a child or grandchild to put towards fractional shares of a stock (or a small number of stocks) in place of toys for a birthday, graduation, or holiday. A custodial account is one way you can make a financial gift to a minor—it can also help teach them about investing. It is set up in the child's name and managed by an adult, and turned over to the child when he or she reaches the age of majority. Invite the recipient to help choose stocks for future gifts.

This can open up real-life discussions about money, risks, the economy, budgeting, and saving. Investment lessons, even at an early age, can last a lifetime.

Be aware that if you think a child or grandchild might be applying for college financial aid in the future, account titling—UGMA/UTMA, brokerage, IRA, etc. may impact eligibility for financial aid. Generally, assets held under a child's name will reduce eligibility for need-based financial aid more than accounts like 529 or Coverdell accounts. Talk with an advisor for more guidance.

Investing in stocks can be volatile and involves risk, including loss of principal. Consider your individual circumstances prior to investing.

Diversification strategies and periodic investment plans (dollar-cost-averaging) do not assure a profit and do not protect against loss in declining markets.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.
 
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