Many people would say the smallest number ofsharesan investor can purchase is one,but the real answer is not quite as straightforward. Today, it is increasingly common for investors to purchase fractional shares, where as little as $1 can be applied to a stock buy order.
Key Takeaways
- There is no minimum order limit on the purchase of a publicly-traded company's stock.
- Investors may consider buying fractional shares through a dividend reinvestment plan or DRIP, which don't have commissions.
- Several popular online brokerage platforms have begun offering fractional shares, along with very low or zero trading commissions and fees, making fractional ownership easier and more cost-effective.
Past Premises of Buying Stock
While there is no minimum order limit on the purchase of a publicly-traded company's stock, many brokers in the past advised buying blocks of stock with a minimum value of $500 to $1,000. This quantity size is due to the fact that no matter what online or offline service an investor uses to purchase stock, there are brokerage fees and commissions on the trade. In most cases, one share would cost the same amount as $500 of the shares.
With many online brokers moving to commission-free trading, these considerations may no longer be as applicable. In addition, it could be argued that once zero-commission and smaller batch transactions began being offers, many more brokerage firms had to update their policies to remain competitive with their offerings.
Buying on the Open Market
When purchasing stock on the open market, an investor should open a trading or brokerage account with afinancial institution, such asE*TRADE, Charles Schwab, or TD Ameritrade. Once the trading account is opened, it's up to the investor how many stocks he/she wants to purchase at any one time. Before making any purchase decisions, an investor should do ample research on the various types of equity securities that are offered.
Although there may not be minimum limits on equity orders, brokers may require a minimum initial deposit to open a trading account.
Once an investor identifies a stock worth purchasing, an online trade shouldbe executedusing abrokerage account. There are two types of trades that can be made in this scenario, the market order,and thelimit order.Stocks that trade in multiples of 100 shares are known as a round lot. For fewer than 100 shares, those orders are called odd lots.
If the investor makes a market order, they arechoosingto purchase the stock at the current market price. If the investor makes a limit order, they arechoosing to wait to purchase the stock until the price falls to a specific limit. While purchasing a single share isn't advisable, if an investor would like to purchase one share, they should try to place a limit order for a greater chance of capital gains that offset the brokerage fees.
Commissions are fees charged on a per-transaction basis up to a specified number of shares that are purchased/sold. Most people prefer to reduce the average commission costs by spreading them over the purchase of many shares.
Buying a small number of shares may limit what stocks you can invest in, leaving you open to more risk.
How toBuy Fractional Shares
There is a way to purchase less than one share of stock. A fractional share is a share of equity that is less than one full share and usually is the result of astock split,dividend reinvestment plan(DRIP), or similar corporate action.
A DRIP is a plan in which adividend-offering corporation or brokerage firm allows investors to use dividendpayoutsto purchase more of the same shares. As this amount "drips" back into the purchase of more shares, it is not limited to whole shares. Thus, you are not restricted to buying a minimum of one share, and the corporation or brokerage keeps accurate records of ownership percentages.
The reasonDRIPsare so popular is that most of them don't have commissions or brokerage fees, so it is cheaper for investors to increase theirholdingsand use their dividend payouts without having to pay extra fees.
Fractional shares are also being utilized by automated investment companies known as roboadvisors. By allowing people to trade fractional shares, such companies provide investors—many of them beginners—with access to stocks they may otherwise not have been able to afford to trade. Due to the growing popularity of such investment platforms, fractional shares are also likely to increase in popularity. Increasingly, traditional online brokerages have begun to offer fractional trading as well.
Buying on the Open Market and Fractional Shares
If a brokerage firm charges $20 per tradeand an investor purchases one shareof ABCWXYZ Corp. for $10 per share, then the total cost would be $30 per share—the cost of the commission plus the cost of the oneshare. Ifthe investor decides to buy 100 ABCWXYZ shares instead for the $10 per share, then the average cost would be reduced to $10.20 [($1,000 + 20) / 100].
Thus, by increasing the number of shares purchased, the average cost (including commission) per share would be reduced and the investor who purchased 100 shares would only have to wait until ABCWXYZ stock price rose $0.20 to $10.20 to break even. As for the investor who purchased just one ABCWXYZ share, theywould have to wait until the stock price soared 200% to $30before breaking even.
But what if you were looking to take part in a DRIP? Let's say you were enrolled in the DRIP of Cory's Tequila Corporation (CTC) and you owned one share of CTC—which pays a dividend of $2 per share and is trading at $40—the $2 dividend would be automatically used to purchase an additional 0.05 ($2 / $40) shares of CTC.
Fractional Shares and the SEC
The Securities and Exchange Commission (SEC) has outlined a number of things for investors to consider before investing in fractional shares. The summary of their notes include:
- Availability: Not all brokerage firms offer fractional share investing, and availability may vary among customers within the same firm.
- Types of Securities: Some firms limit fractional share trading to specific securities, such as stocks or ETFs. Restrictions may apply to certain stock categories.
- Trade Execution: Brokerage firms may execute fractional share orders in real-time or aggregate them throughout the day. The execution method can impact the price received for fractional share orders.
- Order Types and Trading Limitations: Some firms restrict certain order types for fractional shares. Trading limitations may include minimum order sizes or restrictions on after-hours trading.
- Dividends and Corporate Actions: Fractional share owners still receive dividends and participate in corporate actions. Participation is based on the percentage of a whole share owned, though.
- Voting Rights: Fractional share owners may not have voting rights. Availability depends on the brokerage firm's policies.
- Fees: Some brokerage firms may charge fees for fractional share transactions. Investors should inquire about additional fees associated with buying or selling fractional shares.
- Liquidity: Liquidity concerns may arise if the underlying stock becomes illiquid. Some brokerage firms do not guarantee the liquidity of fractional shares.
- Nontransferable: Fractional shares are generally nontransferable between brokerage firms. Transferring accounts may require selling fractional shares in the current account.
Other Special Considerations
Increasingly, online brokerage platforms are offering no-fee trading, spurred on by competition from platforms like Robinhood. This includes free stock and ETF trading involving fractional shares as well. Note that while these platforms may not charge overt commissions, customers may still be paying fees implicitly as these brokerages make money by selling their order flow to institutional investors.
How Do Fractional Shares Work?
Fractional shares work by breaking down a whole share into smaller, tradable units. For instance, if a company's stock is priced at $100 per share, an investor can buy $50 worth of that stock, owning 0.5 fractional shares. The ownership percentage corresponds to the proportion of the whole share owned.
Are Fractional Shares Available for ETFs?
Yes, fractional shares are often available for ETFs. This is particularly beneficial for investors who want exposure to a diversified portfolio of assets without having to buy whole shares of each individual security within the ETF.
What Is the Minimum Investment for Fractional Shares?
The minimum investment for fractional shares varies by brokerage. Consult your brokerage's specific policies for more information.
Are Dividends Paid on Fractional Shares?
Yes, fractional share owners are entitled to receive dividends. Dividend payments are distributed based on the percentage of the total shares owned, providing investors with a proportional share of the company's profits.
The Bottom Line
Buying less than a full share involves acquiring a fraction of a stock, allowing investors to invest in high-priced securities with limited capital. This practice, known as trading fractional shares, provides greater accessibility and flexibility for investors by breaking down shares into smaller, affordable units.
