The post How to Trade Fractional Shares in 8 Steps by Alison Plaut appeared first on Benzinga. Visit Benzinga to get more great content like this.

Fractional shares are partial shares of stock. Instead of buying a full share, you can own a fraction of one. Investors choose fractional shares when they don’t want to invest the value of a full share in a company. Many big-name brokers make it possible to purchase fractional shares directly. If you’re interested in purchasing fractional shares to increase your diversification amongst companies or to own smaller shares, this guide will explain how to do it. Read on to learn to trade fractional shares.

What Are Fractional Shares?

Fractional shares are a partial share of a company’s stock. In the past, brokers only allowed the purchase of full shares, but recently fractional shares have become increasingly common. Fractional shares allow investors to specify how much money they want to invest in a particular company rather than how many shares they want to buy.

For example, suppose a company’s shares sell for $200 a share. If you only want to invest $50 in the company, you could buy fractional shares, such as one-quarter or one-fourth of a share rather than a full share. In this way, you can purchase a small portion of a share if your cash investment isn’t enough for a full one. While building your investment portfolio, fractional shares allow further diversification, as you’re not required to own whole shares of companies. 

How Does Trading Fractional Shares Work?

Buying fractional shares is the same as any other investment in a company. You make a percentage of the gains proportionate to your shares and get the same benefits and associated risks of stock ownership. If you purchase fractional shares of a stock that pays dividends, you’ll receive a proportionate share of the dividends equal to your fractional ownership. 

Look for a brokerage that offers commission-free trading to purchase fractional shares. Otherwise, the costs of fractional share purchases can mean the transaction is too costly and isn’t worth it. 

When you purchase fractional shares, you’ll have the option of dollar-based investing. This means you specify the amount of money you want to invest, such as $40, and buy the number of shares proportional to those funds. 

8 Steps To Trade Fractional Shares

If you’re ready to start trading fractional shares, here are eight steps for how to buy fractional shares right away,

Research and Select a Suitable Brokerage Platform

First, research and select a brokerage platform that offers fractional share trading. When choosing a platform, key factors include fees (look for ones with no fees), simplicity of user interface, available stocks and compatibility with your current brokerage account or preferred trading platform. 

Many well-known online brokers now provide this service, allowing you to easily research and compare their fees, user interfaces and available investment options. Major brokerages that offer fractional share trading include:

• TD Ameritrade
• Fidelity Investments
• Merrill Edge
• Robinhood
• Vanguard
• Charles Schwab

Open an Account with the Chosen Brokerage Platform

Once you’ve selected a broker, you’ll need to open an account. The process typically involves providing personal information, verifying your identity and linking your bank account to fund your trades. Common steps include:

1. Signup online. You’ll be asked for your name, address, social security number and employment information.
2. Link a bank account. Provide a source of funding, such as a checking or savings account, by typing in the account number and routing number details. 
3. Verify account. The brokerage will make a small deposit, usually under $1, to verify the bank account. It may also email or text to verify the contact information provided. 

Fund Your Account

Once you’ve linked a bank account, you have the option to transfer funds directly. You can also set up automatic transfers from a checking or savings account or choose to deposit your paycheck into the account. You need sufficient funds to cover the amount you plan to invest in fractional shares. Some brokerage accounts also accept credit or debit cards or mobile wallet payments. 

Avoid clicking on links requesting account information; to ensure a smooth and secure funding process it’s better to go to the source. Navigate directly to the brokerage website to enter account details. Ensure that the funding source has sufficient funds before initiating the transfer. 

Research and Select Stocks/ETFs for Fractional Trading

Browse the platform to see what fractional shares are available for trading. Most brokers offer a variety of stocks, exchange-traded funds (ETFs) and sometimes cryptocurrencies as fractional shares. When working with a brokerage that allows fractional shares, most stocks or ETFs can be purchased as fractional shares.

When selecting stocks or ETFs, look at company performance and balance sheet, sector analysis and market trends to understand opportunities and investment potential. Consider factors like the company’s financial health, growth prospects and overall market conditions. 

Then, weigh whether you have the tools and understanding to perform a fundamental analysis of stock performance or prefer to invest in diversified index funds that track major exchanges with the S&P 500. 

Place a Fractional Trading Order

When you’ve selected the fractional order you want to place, enter the fractional share trade on your brokerage platform. You can choose between a market order, a limit order or a stop order. 

A market order means you buy or sell at the current market price. Since market orders prioritize execution speed over price, there is a higher chance of price slippage, especially in volatile markets. This means you may buy or sell at a slightly different price than expected.

A limit order sets a specific price at which you want to buy or sell. Limit orders provide more control over the price at which you buy or sell. However, there’s a possibility that your limit order may not get executed if the market doesn’t reach your specified price. It also means you might miss out on immediate market opportunities.

You can also set a stop order to sell when a certain price is reached. Stop orders are aimed at stopping losses when stock prices fall. They combine aspects of market orders and limit orders. 

Consider your risk tolerance and investment goals when choosing an order type. Once you’ve decided on the order type you plan to make, review the trade details before confirming the transaction to ensure you didn’t make a mistake in the details entered.

Monitor and Manage Your Fractional Shares Portfolio

Like any investment, it’s important to monitor your portfolio regularly. Most brokerages offer online investment tools and portfolio management or monitor current performance and historical investment trends. 

As you trade fractional shares, you may need to rebalance the portfolio to match your desired asset allocation and returns. Rebalancing refers to the balance of stocks and bonds in your portfolio that matches your risk profile. Consider your portfolio’s asset allocation, risk tolerance and desired return levels. Each investor will choose their own rebalancing strategy. A conservative portfolio might be 60% to 100% bonds, while a more aggressive portfolio might be 30% to 40% bonds and 60% to 70% stocks. 

While some investors may have in-depth knowledge of markets and choose to continue rebalancing portfolios, others choose a buy-and-hold strategy to ride out market fluctuations. 

 Review and Analyze Performance

When reviewing and analyzing fractional share performance, consider the return on investment, dividends and capital gains. If the stock pays strong dividends but has lost value, it still might be worth holding long-term. Look at the company’s balance sheet and overall market factors and consider your long-term investment strategy. 

If you’ve invested in diversified funds, it’s can be worth riding out market downturns to take advantage of long-term gains. However, this is where each investor’s temperament comes into play. If you have difficulty holding stock during losses or gauging when to sell stocks, an investment advisee or robo adviser can help you objectively gauge market trends and create the best strategy for your goals and risk tolerance. 

Additional Considerations and Tips

Trading fractional shares comes with the same potential risks and pitfalls associated with other forms of investment. You could lose your investment if a stock’s performance doesn’t move as expected. 

To manage risk exposure, remember to diversify investments. Never place your whole portfolio in a few stocks. Instead, distribute invested funds across asset classes, including a mix of stocks, bonds and diversified index funds or ETFs to help mitigate risk.

Fractional share trading allows for further diversification as you can put a small amount in many investments. However, rather than trying to pick stocks, invest the majority of your portfolio in a mix of low-risk bonds and diversified funds with small positions in alternative investments, REITs or stocks you’ve chosen. 

Should You Buy Fractional Shares?

Fractional shares offer simplification of an investment strategy. If a company’s stock price is $14.22, you don’t have to invest a multiple of that number. Instead, you could choose to put $20 or $100 in the stock and own a number of shares plus a fractional share. Whether you buy fractional shares depends on personal preference and investment goals. 

Remember to research companies, diversify across assets to balance your portfolio for risk and include diversified index funds, ETFs and mutual funds, along with bonds and savings. Don’t try to time the market; instead, buy and hold for the long term and use dollar-cost averaging to take advantage of long-term returns. Find more on investing tools and guides here. 

Frequently Asked Questions

The post How to Trade Fractional Shares in 8 Steps by Alison Plaut appeared first on Benzinga. Visit Benzinga to get more great content like this.