Fractional shares: How to invest small in stocks like Amazon and Tesla

Share trading and investing has surged in popularity in the pandemic, with a new breed of younger investors emerging who are increasingly attracted to big name US shares.

But there’s a hurdle for some: if you want to buy a single Amazon share it will cost you $3,342, about £2,400 for a UK investor, while just one Tesla share costs $713, and even a lower-priced individual Apple share costs $146.

DIY investing giant Hargreaves Lansdown revealed yesterday that it has seen a surge in younger investors, but the past 18 months has also seen business boom for upstart rival trading apps and platforms, such as Freetrade, Trading 212 and eToro.  

An attractive part of the latter’s offering compared to the DIY investing platform old guard is the chance for investors to snap up fractional shares: a way to back stock market juggernauts for a fraction of the cost of one share.

Investors can get a slice of expensive tech companies like Amazon, which has a share price of $3,342, or about £2,400, through fractional share trading

What is a fractional share?

Fractional share investing lets investors own a piece of a share rather than one or more whole individual stocks.

Shares trade on the stock market as whole, rather than a portion, so the way to buy or sell fractionally is through a broker, DIY investing platform or app that offers this, and not all do.

Those that do offer fractional shares enable investors to more easily invest in leading stocks with big ticket share prices like Amazon. 

The advantage is that these may otherwise be out of the reach of smaller investors, or require too big a chunk of an individual’s portfolio for it to remain diversified. 

For example, even for someone with a £20,000 investment portfolio, holding just one $3,342 Amazon share would equate to about £2,400 – more than 10 per cent of their holdings.  

How do I invest in fractional shares?

Fractional shares do not trade on the open market so investors will need to sign up to a trading platform that offers them. 

The most popular platforms for fractional share ownership in the UK are eToro, Trading212 and Freetrade, which all charge zero commission on trades so fees don’t eat into returns.

In contrast, the big gun DIY investing platforms Hargreaves Lansdown, Interactive Investor, AJ Bell and Fidelity don’t offer fractional share ownership.

Investors can invest in fractional and whole shares, so they could put part of their portfolio in a fraction of a share in a company with a big share price like Amazon and the rest in cheaper stocks that would allow them to buy full shares. 

It gives retail investors the opportunity to have a slice of such companies, while simultaneously diversifying their portfolio.

The problem is more acute for investors in big US stock market names, particularly the tech giants, where individual share prices tend to be higher. UK fractional shares aren’t as common, partly because there aren’t as many bumper share price stocks listed on the London stock exchange as in the US.  

How else are fractional shares created? 

Investors can also own fractional shares without setting out to invest in them specifically. 

This can happen through dividend reinvestment plans (DRIPs), stock splits and through mergers and acquisitions.

A DRIP is when a dividend-offering company or brokerage firm allows investors to use dividend payouts to purchase more of the same shares. 

Because it ‘drips’ back into the purchase of more shares it is not limited to full shares.

A 3 for 2 stock split would create three stocks for every two an investor owns, so an investor with an odd number of shares would end up with a fractional share.

Finally, M&As may also create fractional shares if companies combine new common stock using a predetermined ratio.

Will I get my dividends?

If you opt for fractional shares in a company that pays dividends you will still be entitled to a portion of the payouts. 

The dividends are calculated based on the portion of a share the investor owns.

If a company pays its shareholders £5 in dividends per share and an investor owns half a share, they will be entitled to £2.50.

Are fractional shares worth investing in?

Fractional share investing is a good option for investors with limited funds, or those new to investing, who would otherwise be priced out of buying shares in popular stocks. 

Even for some investors with larger portfolios, it makes sense for diversification purposes.  

They can also simplify the way people invest: it allows investors to allocate a sum of cash to a given company rather than try to fit a company’s share price to the amount of cash you want to invest.

The question is more whether it is worth seeking out a platform that offers fractional share investing over one that doesn’t. Ultimately, that will depend on your investing style and preferences – for example, if you mainly hold UK shares it is less of an issue, but if you plan to directly hold big US stocks it might be worth doing. 

Many of the new trading apps also do not offer fund investing and some may not have either an Isa or a Self invested personal pension option, meaning that overall one of the more established DIY investing platforms with a wider offering may prove better. You can read our guide to DIY investing platforms here. 

David Kimberley, analyst at Freetrade said: ‘Fractional shares allow investors to get started with as little as £2. 

‘In order to grow your money, it’s important that investors prioritise time in the market, rather than trying to time the market. 

‘With fractional shares, you have the ability to invest smaller sums across a number of companies immediately, meaning that investors can start putting their hard-earned money to work, rather than saving up over months (or years) to buy a single share of a company like Alphabet.’

However, fractional shares may prove harder to transfer to a new provider or sell and if investors don’t opt for zero commission platforms, they can rack up fees that eat into returns.

This post first appeared on Dailymail.co.uk