With fractional shares, every dollar of a small deposit is invested at once instead of waiting in cash for a whole share. Set up automatic monthly buys of one broad index fund at a fractional-share broker, and expect the fractions to be sold, not transferred, if you switch brokers.
At $50 a month, buying only whole shares means a year of saving before you own one share of a $600 exchange-traded fund (ETF), a fund that trades like a stock. Fractions let each $50 buy about 0.083 of a share right away.
Which stocks and ETFs you can buy in fractions depends on the broker. Fidelity sells fractions of most stocks and ETFs listed on the NYSE or Nasdaq, from $1. J.P. Morgan Self-Directed Investing limits them to stocks in the S&P 500 and Nasdaq-100 indexes and the ETFs on its eligible list, from $5. Vanguard sells them on its own ETFs, from $1.
The catch that costs money comes when you move your account. FINRA, the regulator that oversees brokers, says fractional shares can’t transfer to another firm, so only your whole shares move and the fractions are sold for cash. In a regular brokerage account, unlike an IRA, that sale can mean tax on any gain.
Fractions have smaller drawbacks too. Fidelity gives them no shareholder vote, and fractional orders often go through only during regular market hours. Some brokers also collect a day’s fractional orders from all their customers and send them to the market together, which can change the price you pay. None of that hurts the best use of fractions, which is automatic dollar-amount buys of one broad index ETF you hold for years.
- Check that your broker sells fractions of the fund before you schedule anything.
- Schedule the buy in dollars, such as $50 on the 1st of each month. Fidelity’s recurring investments buy the fractional shares automatically.
- Keep buying that one fund rather than spreading small amounts across many.
Your fractions add up to whole shares as you keep buying, so moving your account never sells more than one share’s worth of each fund you hold.
To find a broker that sells fractions of the ETF you want, compare the best brokers for fractional share investing.
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