If you have limited funds to invest, you may not want to purchase a round number of shares in an exchange-traded fund. Luckily, some brokerages will allow you to buy fractional shares in such funds, enabling you to invest with the money that you do have. It's a good idea to keep an eye on the fees involved to make sure your investments still make sense.
You can purchase fractional shares in ETFs directly through some brokers or obtain them through dividend reinvestment.
Understanding Exchange-Traded Funds
Exchange-traded funds are investment vehicles similar to mutual funds, except you can buy into them and sell your stake through an exchange, like with individual stocks. You can buy and sell them through most stockbrokers, though not all allow you to buy fractional shares.
Some brokers will charge you a commission when you buy and sell, so it's important to research these fees so you can decide which broker works best for your investment needs. Some may charge you a monthly fee or a percentage of the amount of money you have under management, which may be cheaper depending on your investing and trading strategies.
Some ETFs are also index funds, which invest in the stocks on a common stock index like the S&P 500 or the Nasdaq composite. Because they don't require active management, such funds can be cheaper to invest in than traditional mutual funds, which require hired experts to pick stocks to invest in.
Buying Fractional Shares
Check with your broker, or research brokers online, to find out if you are able to purchase fractional shares. Doing so can be useful if you want to invest a small amount of money or make sure that as much of your money as possible gets invested, without having to limit yourself to round number multiples of the share price for a given ETF or stock.
Also keep in mind that if you ever choose to move your account from one brokerage to another, you may not be able to move those fractional shares, since not all brokerages support holding them in your account. In that case, you may have to sell the fractional portions, which may require you to pay tax on any gains.
Other Ways to Get Fractional Shares
If you invest in an ETF or stock with dividend reinvestment enabled, you may also end up owning fractional shares if the dividend you receive isn't enough to purchase more shares. With a stock, this can also happens if the stock splits, exchanging your shares for a proportional amount of shares, if the split doesn't divide evenly into your holdings.
- Exchange-Traded Funds for Dummies; Russell Wild
- The ETF Book: All You Need to Know About Exchange-Traded Funds; Richard A. Ferri
- ETFs for the Long Run: What They Are, How They Work, and Simple Strategies for Successful Long-Term Investing; Lawrence Carrel
- All About DRIPs and DSPs; George Fisher
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.