Did you hear you can trade fractional shares now? That means you don’t have to buy in one share increments. You can purchase one-fourth of a share of AMZN or one and a half shares or whatever. Today I want to explore the implications of this new trick and reveal how it may or may not benefit traders.

For ages, the only way you could buy partial shares was through dividend reinvestment programs, known as DRIP. I do this with growth strategies or passive investments, where I want to increase my share count as much as possible. For example, let’s say you own 100 shares of a $50 stock, and tomorrow it pays a 25 cent dividend. Since you own 100 shares, you will get paid $25 (0.25 x 100). You can accept that as cash or have your broker automatically buy $25 worth of additional stock. But since the stock is trading for $50, you don’t have enough to buy a full share. It doesn’t matter. The broker will buy one-half shares.

Here’s a screenshot showing a stock position in VOE that has dividends reinvested:

I received an email this week from Interactive Brokers announcing they now offer the trading of fractional shares. Here’s what they put forth as the advantages:

Here Are My Thoughts

First, I don’t know what you consider “substantial sums of money,” but I feel like if you don’t have enough capital to buy a full share of stock, then maybe you shouldn’t be live trading at all. The majority of the companies in my watchlist offer share prices under $150. Are you telling me you can’t buy a single share? That’s too much risk? If your stop-loss is 10% below your entry price on a stock trade that involves one share, you’re risking $15 or less.

If you can’t afford $15 risk per trade, then can we all agree you shouldn’t be live trading yet?

Second, learning how to operate a trading platform in a live environment while only risking a few bucks is actually a compelling benefit. I like it. Though, you do already get that feel by virtual trading. And, again, I feel like you could achieve the same benefit trading a single share of stock.

Third, learning how to build extensive portfolios and rebalancing is interesting. It applies more to a long-term passive investor than a short-term trader, though. But I do like the benefit. I don’t know how many here are trying to create their own index. I suspect most of us would just buy an ETF if we wanted diversification. Let’s be honest, if you’re sophisticated enough to single-handedly create a diversified basket of stocks to practice rebalancing the weightings, don’t you probably have enough money to buy a single share of whatever stocks you want to include?

I think the whole fractional share deal is solving a problem that never really existed.

The One Exception

If I’m a passive investor with a desire to dollar-cost average small sums of money into an expensive stock/ETF like SPY ($305) or AMZN ($1500), then obviously having the ability to buy partial shares is a big benefit. Otherwise, I’d have to sit in cash for months until I scraped together enough capital to buy a single share. If you’re only investing $100 per month into AMZN, then it would take you 15 months to save enough before you could invest it. With fractional shares, you could buy some of AMZN every month.

My solution would have been to simply find a cheaper ETF or stock to dollar cost average into.

Not all brokers offer fractional share trading right now. Interactive Brokers does, but TD Ameritrade (and TOS) don’t.

One final point. Fractional share trading is only feasible because stock commissions have been slashed to zero. In a world where you’re paying $5 a trade, buying $10 worth of stock is idiotic. But when you pay zero to buy $10 worth of stock? That can work.

Are there any other benefits to fractional share trading you can see? If so, let me know!

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