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Investors can begin investing in fractional shares with as little as $1
November 6th, 2023 Latest Blogs
In the past, investing in the stock market has been linked with a substantial financial commitment, frequently requiring people to buy whole shares of a company’s stock. However, introducing fractional shares has transformed this landscape, making it more inclusive and accessible for a broader spectrum of investors.
As the name suggests, fractional shares represent portions of a single share, allowing investors to invest in fractions rather than total shares. This innovation has gained immense popularity in the US market, enabling individuals with limited capital to participate in the ownership of leading companies.
Fractional shares are typically created through several processes, including stock splits, mergers and acquisitions, and dividend reinvestment plans (DRIPs). Stock splits involve breaking down a whole share into a fraction, often occurring with an odd ratio of shares.
For instance, in a 5:4 stock split, investors would receive 5 shares for every 4 shares they own, resulting in fractional shares. Similarly, mergers and acquisitions with specific share ratios may form fractional shares in the new combined entity. Additionally, dividend reinvestment plans allow shareholders to accumulate fractional shares through the reinvestment of dividends received.
Things to Know Before Investing in Fractional US Shares
Low Initial Capital Requirement
One of the most attractive features of fractional investing is the low initial capital needed to get started. Investors can begin investing in fractional shares with as little as $1, breaking down the barriers that traditionally restrict entry into the stock market.
Easy Predefined Investments
Fractional investing allows for predefined investments, enabling individuals to invest specific amounts of money quickly. For example, even if a company’s share price is relatively high, such as $500, investors can comfortably invest a predefined sum like $50.
Price Inflation Concerns
Fractional investing has democratised the stock market, allowing a broader range of investors to participate. However, this increased demand for fractional shares could lead to inflated prices. Investors must conduct thorough research and diligence on a company’s valuation before making investment decisions.
Risk of Over-diversification
The availability of fractional shares allows investors to diversify their investments quickly across many firms. However, this accessibility may also lead to over-diversification, diluting the potential impact of their assets. Investors must plan and selectively invest in companies to avoid this pitfall.
Considerations for Dividend Payouts
Investors must know that owning fractional shares may result in lower dividend payouts. If the ownership percentage of a company is too small, the dividend payouts received by the investor will also be proportionally reduced.
Summing Up Fractional Investing
Fractional investing offers a strategic way for investors to diversify their portfolios beyond their local markets, particularly for Indian investors who face challenges due to the unaffordability of high-priced stocks in their home market.
With the right strategy, investors can own fractional shares of top US companies like Apple, Tesla, Amazon, and more, even with limited capital. This investment approach requires careful planning and consideration to make informed decisions in line with individual financial goals and risk tolerance.
(Author is Cofounder and Director, Prime Wealth Finserv Pvt Ltd – QPFP, Qualified Personal Finance Professional)
Disclaimer
The information provided in this article is for educational purposes only and should not be considered as financial or investment advice. The content is intended to provide general information about fractional shares and their implications. It is essential to conduct thorough research and consult with a qualified financial advisor before making any investment decisions. Any action taken based on the information presented in this article is at the sole discretion and responsibility of the reader. The authors and Prime Wealth Finserv Pvt Ltd are not liable for any losses or damages from using this information for investment purposes.
