Investing can seem like an intimidating act of adulting, especially when buying even a single share of certain companies can require hundreds of dollars.
Enter: fractional shares. These are mere portions of a share of a particular stock, mutual fund, exchange-traded fund (ETF) or other investment—which means you can get into them with much less cash than you’d have to pay to purchase full shares.
What’s a stock?
A stock is a fraction of a public company’s assets and earnings. When investors buy stock in a company, they essentially become part-owners of the company. So that makes a fractional share a fraction of a fraction of ownership.
How does that happen?
Mutual funds have long worked in fractional shares, with investors typically putting up specific dollar amounts and being given the corresponding number of shares, even if it results in fractions of shares. But with stocks, fractional shares have been historically less common and created through one of three ways:
Dividend reinvestment plans (DRIPs): These are programs that allow existing shareholders to reinvest their dividends (a periodic payout of earnings that some companies and funds share with investors) by buying additional shares, or fractions of shares, directly from the company.
Mergers and acquisitions: These actions require combining the old stocks into a new common stock based on a specified ratio, which often results in fractional shares for existing shareholders.
Stock splits: These corporate moves aim to make stocks more affordable by dividing existing shares into cheaper pieces. When they don’t split evenly, that results in fractional shares.
You still can’t buy fractional shares on the open market. Over the past few years, though, a growing number of brokerage firms and investing apps, including Acorns, have started allowing their own clients to purchase fractions of shares in stocks or funds. (Acorns portfolios are made up of different exchange-traded funds with exposure to thousands of stocks and bonds.)
Why would an investor want to buy just part of a stock?
Fractional shares allow investors to buy into the stock market at a lower price and start investing earlier. Buying full shares of certain desirable stocks—such as household names like Amazon, which traded at around $1,760 a share as of mid-December, and Google parent company Alphabet, which traded at about $1,350 a share—may be out of reach for many individual investors, especially those who are just getting started.
Even typically cheaper ETFs can have high starts. For example, Vanguard S&P 500 ETF (used to build certain Acorns portfolios) is more than $290 a share, and iShares iBoxx $ Investment Grade Corporate Bond ETF (also used in some Acorns portfolios) is about $128 a share. And many mutual funds have required minimum initial investments of $1,000 or more.
Considering you need much more than just a single share of any one investment to build a well-diversified portfolio, it can seem like investing in the stock market can require more money than many of us have available to invest at one time. Micro investing changes that and makes Wall Street more accessible to regular individual investors.
So, what is micro investing?
It’s investing in super-small increments using fractional shares. And it allows people to start investing with $5 or less.
With Acorns, for example, you can set up a brokerage account and link it with a funding source (like a bank account) and the debit or credit cards you often use for everyday purchases. Then, through the Acorns round-up feature, every time you use a linked card, the charge gets rounded up to the next dollar amount and pulled from your funding source. Typically, once your change adds up to at least $5, the money gets invested into your custom portfolio, a mix of funds with allocations designed to match your goals and risk tolerance. Acorns Spend card users, though, can get the round-ups from their linked purchases invested in real time. (You can sign up for Acorns here.)
Why not just wait until I have more money to invest?
Getting started with investing sooner rather than later gives your money more time in the market. And with enough time, any small sum can grow into a sizable stash of cash, thanks to the power of compounding, i.e. your money’s ability to earn interest on interest.
For example, let’s say you save $10 a week. That adds up to $5,200 after 10 years. Nice! But putting that cash into a savings account that pays 1 percent (about average for such accounts, according to Bankrate) does even better: Compounded monthly, your savings would total $5,468 after 10 years. And better still: By investing that $10 a week in a portfolio of stocks that earns an average 6 percent a year, you rack up $7,115 after a decade. That’s an extra $1,915—with no additional cash contributions required of you.
That doesn’t seem like a lot of money.
Even if you have a few more decades to work with, saving and investing such small amounts will likely never become enough to fully fund your retirement or other lofty long-term financial goals. To achieve those, eventually, you need to save and invest greater amounts.
Still, you have to start somewhere. And getting started as soon as possible, even with just a little bit of money, is a good way to develop positive financial habits early that you’ll hopefully build on and keep up over the long term.
Micro investing with fractional shares lets more people make small investments regularly, a common investing strategy called dollar-cost averaging (though it’s not limited to the tiny amounts unique to micro investing). And this kind of routine not only helps you get used to investing, it also helps you practice buying low and selling high—a classic mantra of successful investors.
That’s because you’re using the same amount of money each time you invest, and you’re investing on a set schedule, no matter what’s going on in the market. This naturally leads you to buy more shares when prices dip and fewer shares when they go up.
Bonus: Having an investing routine can make it easier to stomach volatility inherent to the stock market. While stocks have historically headed upward over the long term, that rise has often been disrupted by dips and drops that understandably make many investors queasy and anxious.
By sticking with a strategy of making small and steady investments, you can ease the shock of those down days and help minimize the risk that you’ll freak out and exit the market out of fear, locking in any losses. Then, you can just focus on the future, allow your money to grow and improve your chances of achieving your big financial goals.
Investing involves risk including loss of principal. This article contains the current opinions of the author, but not necessarily those of Acorns. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.