In the second half of May 2022 video game manufacturer Electronic Arts (EA -0.35%) rose from less than $112 per share to $138 per share. The company, known to gamers and sports fans as EA Sports, recently reported double-digit growth in annual net bookings and its player network.
EA’s price of $135-$140 isn’t too intimidating — especially when compared to high-priced stocks like EA AutoZone and Chipotle Mexican Grill. These two positions are trading above $2,000 and $1,360, respectively. However, if you’re just starting your investing journey, you might not want to throw this week’s entire investing budget at a single stock — no matter how much you love playing FIFA 22.
Fortunately, there is a way to own EA stock for well under $140.
Enter partial investments
Fractional investing is the practice of buying stocks in units of less than one. Depending on your broker’s rules, you can buy a position of as little as one millionth of a stock, and in that case your price for that position will be one millionth of the stock’s share price.
In terms of EA, you could spend $1 to buy about 0.007 shares. Your fractional shares would go up and down in value, just like a whole share.
The disadvantages of fractional investing
So you can buy stocks at the change price you find on the couch. What’s the catch? Well there are a few.
Here are four disadvantages of fractional investing. These can be minor or major issues depending on your investment practices.
- Fractional Shares may be less flexible than whole Shares. Fractional investments are made possible by your broker – not the exchanges. This is important because it means your broker defines the transferability and settlement rules. You often cannot transfer fractional shares to another account. You would have to sell them and then transfer the money. And some brokers take longer or charge additional fees to process fractional share sales.
- Partial investment fees can be expensive. When you make very small stock purchases, trading fees consume a large percentage of your investment budget. Fortunately, there are brokers that do not charge partial transaction fees.
- You could be missing out on dividends. Fractional shares pay fractional dividends. Suppose you own half a share of EA. In that case, you’d be earning half of EA’s quarterly dividend of $0.19 — which equates to $0.095. Your broker decides whether to round this amount up or down to the nearest whole penny. Note that if your share of the dividend is less than a cent, you may not get anything at all.
- Your taxes can get messy. The usual tax regulations apply to partial investments. You would owe taxes on dividends and realized gains. If you trade frequently, you may have to go through a lot of details to sort out your tax bill at the end of the year.
How to get started with fractional investing
Disadvantages aside, fractional investing is a no-fuss way to invest on the smallest budget. Not only can you own (fractions of) very expensive stocks, you can diversify into 10 or 20 positions with as little as $20.
To start fractional investing, find a suitable broker. Some options here are Fidelity, Karl SchwabM1 finances, recovery, Robin Hoodand SoFi Invest.
Check the terms of each broker carefully. Specific points of comparison are:
- Buying and Selling Fees
- handling dividends
- billing time
- Minimum Trade Amount
- Positions available for split purchases
- Dealing with shareholder voting rights
- Automations – Ability to set up recurring investments
Once you’ve chosen your broker, fund your account, plan your investment approach, and start trading.
From fractions to whole numbers
Fractional investing might be your gateway to investing, but it’s not your endgame. Grow your portfolio into full stock positions by investing regularly and increasing your budget frequently. Stay the course and soon you could be measuring your wealth in thousands of dollars instead of cents.