Fractional Stock Trading Guide

Some retail investors find themselves priced out of a stake in the biggest names on the market, with a single share in the most prestigious companies often valued in the thousands. The answer for these investors may lie in fractional stock trading, a recent innovation that allows anyone to buy a small fraction of one share – sometimes for only a few pounds – meaning that almost anyone can afford to buy a slice of the biggest pies on an exchange.

This investing guide will detail the meaning and history of fractional shares, giving investors the lowdown on the good and bad sides of this type of stock trading and how it could affect their trading strategy. We also list the best stock trading platforms and apps in 2024.

• Fractional shares allow UK investors to buy a small part of a company’s stock that is worth less than one whole share
• Investors can benefit from fractional stock trading as it allows them to hold a diverse portfolio that includes larger, expensive stocks
• There are both pros and cons to investing in fractional shares, as they may involve higher costs than normal stock trading
• Fractional shares are useful for strategies such as dollar cost averaging

Fractional Shares History

Imagine this: a fresh young worker gets their first month’s pay in their new job and decides they want to invest in stocks. So, they research the most successful companies, and discover that American investor Warren Buffett’s firm, Berkshire Hathaway, is frequently cited as providing the best returns. There’s just one problem – a single class A share in Berkshire Hathaway (BRK.A) will set you back a cool $440,000.

Most companies’ shares are far less pricy, but stock in the best-known firms will still often cost thousands of pounds. A single share in one of the FTSE’s most expensive companies, Astra Zeneca, cost more than £10,700 in August 2022, and one share in Coca Cola will cost an investor more than £2,000.

Directly buying such expensive stocks was out of the question for many retail investors until November 2019, when Interactive Brokers became the first platform to allow users to trade fractional shares of almost any stock. In the years since, many more online trading platforms such as eToro and Revolut well as some legacy brokers like Charles Schwab and Fidelity in the United States, have appeared on the scene to offer fractional stock trading and ETFs to investors.

Fractional stock trading on eToro

Fractional penny stocks allow the investor not only to buy a percentage of the full share, but also to benefit from a commensurate portion of any price increases or dividends that the owner of full shares in the company would enjoy. So, an investor who spends around £200 on Coca Cola HBC (CCH) stock on the London Stock Exchange would own around 10% of one share, and would see their fractional share’s value grow to £210 if Coca Cola’s stock price went up 5%.

At the same time, they would be due 10% of the amount paid out per share in dividends. However, fractional shares in many cases do not carry voting rights, so if you own 20.5 shares in a company, you only gain voting rights for 20 shares. You can check with your broker to see whether you will be granted voting rights on your fractional shares.

Trading Fractional Stocks

It is technically not possible to buy or sell anything less than a whole share on the stock market. So, before 2019 the only way investors could directly own fractions of a share was if they were signed up to a dividend re-investment plan, or DRIP, which would automatically have triggered reinvestment of their dividend payments into shares. Unless the investor has a large stake in the company, dividend payments usually amount to less than one whole share, meaning investors with a DRIP receive fractions of a share instead.

With the advent of fractional share trading, brokers are able to offer investors slices of shares in two ways: batch trading and real-time trading.

Batch Trading

In batch trading, the broker accumulates fractional share buy and sell orders throughout the day, and then executes the purchase or sale of the shares once or twice per day in batches. This method is convenient for the broker, but it will mean there is a delay between the time an investor submits their order and the time the transaction takes place.

Real-Time Trading

Some brokers sidestep the need to accumulate orders throughout the day by offering investors fractional shares from the stocks in their own inventories. This also removes the inconvenient time lag, though it is not yet as common as batch trading.

Fractional Stock Trading Strategy

Fractional shares can boost a trader’s portfolio and augment their strategy in several ways…

It’s worth noting that before fractional shares, the only way for an individual investor to have less than a single share’s exposure to a company was by investing in a fund which has positions in a range of stocks. In this case, the investor’s money is pooled with that of others and invested by the fund’s managers according to their own criteria. As a result, individual investors usually have no control over the fund’s strategy.

With fractional shares, the investor can forego the middleman and directly choose their own roster of companies to invest in, as well as allocating the proportion of their capital to each company as they see fit.

This adds a great deal of flexibility to their investment choices. If an investor has around £10,000 starting capital and they’re determined to have a position in AstraZeneca (AZN), they won’t need to choose between buying a single share in the company or investing in a fund.

Instead, they can buy a fractional share in AstraZeneca as well as shares in Amazon (AMZN), Tesla (TSLA), Gamestop (GME) or any other company they have their eye on. In other words, they can build a diverse portfolio of their own choosing which they, and not a fund manager, are in control of.

Fractional shares are also useful for investors who practice common strategies like dollar cost averaging. Many investors prefer not to stake all of their capital at once, since this places them at higher risk from price slides. Instead, they invest a specific amount at set periods, lessening the risk as the total price of their investments averages out over the course of a year. Fractional shares make dollar cost averaging a more feasible strategy since it makes it possible to invest small amounts in a stock as many times as you like.

Conversely, investors can also benefit from fractional shares if they want to take profits when an investment starts to pay out. Since it’s impossible to know the optimal time to sell a share before it has been and gone, many traders prefer to take profits at specific intervals or under specific circumstances – for example, a trader might wish to sell 5% of their stake if the stock price rises by 10%. Fractional stock trading makes this strategy achievable for investors who hold a low number of shares in a company.

Fractional Shares Drawbacks

While fractional shares bring unprecedented flexibility to traders, there are a few drawbacks. For one, brokers may treat fractional stock trading as a service they provide to their clients. In this case, they will usually add a charge to fractional share transactions – either in the form of an up-front transaction fee, or in the form of a markup to the cost of the share. In other words, you may have to pay more than £10 to buy a 10% slice of a share whose market value is £100. Remember that these charges will be applied in addition to any other fees charged by the online broker, so it’s wise to research this as you plan your investments.

Another issue with fractional shares is that you may not be able to transfer them with your other investments if you decide to switch brokers or trading platforms. Instead, you will probably have to sell any fractional shares in your portfolio when you make the switch. This is usually not a big issue for investors, but it might mean they are forced to take a loss on a part of their investment, and if they make a profit they must remember to file it on their tax return.

Finally, while trading fractional stocks offers the flexibility to take positions in a diverse range of companies, they are not widely available on established brokerages in the United Kingdom. Firms like Hargreaves Lansdown, Vanguard, XTB, and Degiro do not offer fractional shares in the UK, but instead, many boast a diverse range of ETFs. These managed funds may serve casual investors better than trying to pick fractional shares – particularly if they are purchased through an ISA.

Bottom Line On Fractional Stock Trading

Retail traders can buy a small stake in a company, such as Google, through one of the various online brokers, trading platforms and investing cash apps which offer fractional shares. The ability to make trades with smaller amounts of capital allows investors and beginners to take positions in a diverse range of companies, even if their individual stock price is high. This is great news for investors who make the effort to research a number of companies and want to be able to micromanage their investments. It is also an excellent way to execute strategies such as dollar cost averaging, which relies on regular, smaller investments rather than larger lump sums.

However, there may be some additional costs involved in fractional stock trading, and often an investor would be better served by investing in a managed fund from an established broker.

Use our list of top brokers that offer fractional stock trading to get started.

FAQ