Comprehensive Guide to Fractional Shares: Everything You Need to Know

What Are Fractional Shares?

Fractional shares are a type of investment that allows you to buy a portion of a single share of stock. Unlike traditional investing, where you buy whole shares, fractional shares enable you to invest in a company with as little as a fraction of a share. For example, you can own 0.5 shares of a company, or even just 0.001 shares. This concept has revolutionised investing by making it more accessible to a wider range of investors. Fractional shares can be purchased in various asset classes, including stocks, exchange-traded funds (ETFs), and even some mutual funds. We currently offer fractional investments across a wide range of stocks and ETFs that are traded on multiple exchanges in the US, EU and UK. To see which shares have fraction investing enabled, please refer to our instruments table. 

How Do Fractional Shares Work?

Fractional shares work through brokerage platforms that offer this feature. Here's a step-by-step breakdown of how it works:

Choose a Brokerage: You need to open an account with a brokerage that offers fractional share investing. At XTB we request clients to fill out an online application form either through the website or the mobile app. Within this application process, clients will need to undertake a relevant assessment, consisting of 4 multiple choice questions. This step is essential to ensure their compatibility with the product. Upon successful completion of the application, clients will be prompted to submit Know Your Customer (KYC) documents, such as identification and proof of address, in order for us to authenticate their identity. Once the KYC process is finalised, your trading account will be established. With the trading account active, clients will gain unrestricted access to both the trading platform and the client office. 

Fund Your Account: After opening your brokerage account, you'll need to deposit funds into it. These funds will be used to purchase fractional shares.

Select the Investment: Choose the stock or ETF you want to invest in. Instead of specifying the number of whole shares you want to buy, you enter the dollar amount you want to invest.

Place the Order: Submit your order, and the brokerage will execute it, buying the appropriate fraction of the selected asset. XTB handles all the calculations.

Ownership and Dividends: You will now own a fraction of the selected asset, and your ownership is recorded electronically. If the asset pays dividends, you'll receive a proportional amount based on your fractional ownership.

Advantages of Fractional Shares

Fractional shares offer several advantages to investors. One of the primary benefits of fractional shares is that they lower the barrier to entry for investing. Investors with limited capital can diversify their portfolios and invest in high-priced stocks they might not have been able to afford otherwise.

Fractional shares enable investors to diversify their portfolios more effectively. Instead of putting all your money into a single stock, you can spread your investments across multiple assets. With fractional shares, you can invest your entire available capital without having to keep cash aside for whole shares. This ensures that your money is fully invested, potentially maximising your returns. In the case of a stock split, your fractional shares would be adjusted accordingly. For example, if you owned 0.5 shares before a 2-for-1 stock split, you would own 1 share after the split. In the case of a reverse split, your fractional shares might be converted into cash or whole shares. 

Investors can use fractional shares to learn about the stock market and experiment with different investment strategies without risking significant amounts of money.

While fractional shares offer many advantages, they also come with some drawbacks. Not all stocks and ETFs are available for fractional investing. Smaller or less popular companies may not be offered as fractional shares by all brokerages. In most cases, fractional shareholders do not have voting rights at shareholder meetings. This means you won't have a say in company decisions. 

Investment Strategies with Fractional Shares

Fractional shares can be used in various investment strategies:

• Dollar-Cost Averaging (DCA): Investors can set up recurring investments in fractional shares, allowing them to buy more shares when prices are low and fewer shares when prices are high. This strategy can help mitigate market volatility.
• Portfolio Diversification:Fractional shares make it easy to diversify your portfolio across multiple assets, reducing risk.
• Targeted Investments: Investors can allocate a specific amount to individual stocks or sectors, allowing for precise portfolio management.

Fractional Shares and Dividends

When you own fractional shares of dividend-paying stocks, you are still entitled to a proportionate share of the dividends. At XTB you are entitled to the economic benefits of a fractional share in much the same way as a whole share. Meaning you benefit from dividends which equates to the fractional holding of your investment. 

Risks and Considerations

Before investing in fractional shares, it's essential to consider the following risks. Fractional shares are still subject to market fluctuations. You can experience gains or losses just like with whole shares. Not all assets have high liquidity for fractional shares, which can affect your ability to buy or sell them at your desired price. 

Final Thoughts

In conclusion, XTB's introduction of fractional shares represents a leap forward in the world of online investing. We believe that fractional shares empower investors to seize opportunities and build diversified portfolios, regardless of their initial capital. As we move forward, XTB remains committed to providing innovative solutions and enhancing the accessibility of financial markets for all.