Table of Contents
What is Fractional Share?
Fractional shares are portion of a company stock. Instead of owning a full unit, now you can own a fraction of it. In the past, to own just 1 unit of stocks like Google $2800 is pretty hard for retail investors with lower income. However, fractional share change the whole story, now you can own 0.01 unit of Google.
Where can you buy it? Interactive Brokers is the first broker bringing fractional share investing/trading to the whole world.
What are the Best Stocks to Buy Fractional Shares?
My answer for you is Big TECH Stock.
TECH stock like Facebook, Apple, Amazon, Google, Microsoft are growing bigger and bigger. They are at the forefront of latest technology, such as cloud computing, Artificial Intelligence, e-Commerce. These company revenue will keep increasing, net profit keep growing every year, the founder net worth will become richer and richer. Their share price will hit the new high from time to time! They are pandemic proof. Their strong economy moat is hard for competitor to replace. They are already in our daily life…….
Common sense questions to ask yourself
- Do you surf Facebook?
- Do you advertise your product at Facebook?
- Do you use WhatsApp or Instagram?
- Are you a graphic designer swear by Apple?
- Are you iPhone iPad user?
- Your company IT team using Amazon cloud?
- Love to buy things at Amazon?
- Do you perform search at Google?
- Always watch video at YouTube?
- You using any Android phone?
- Your office computers got use Windows 10?
- Office meeting got use Microsoft Team?
- Using Azure for IT stuff?
- …
Make sense?
Why these TECH stock are not cheap?
Because they keep on proving themselves by earning huge net profit year after year. Even after business become this big, they still able to keep growing, become even bigger. This is why their stock price will keep on hitting all time high in long run.
They don’t need us, but we need them
Stocks like Amazon currently staying at $3500, but not yet stock split, probably Jeff Bezos also don’t care it too. Share trading at high price make retail investors from ASEAN countries like us hard to own it.
1 lot of Amazon = $350,000 ($3500 x 100)
(equal to RM1,540,000 – the price of 1 high end semi-d in Malaysia)
Comparing Normal Stock Purchase to Fractional Stock Purchase
Scenario 1: Topup Fixed Amount Every Month
In this scenario, you going to topup $1000 each month, using dollar cost average method to keep accumulating good quality share.
Buying share via the normal way
In this case, not enough money to buy Google and Amazon, so give up on this two first. This fund allow me to buy 3 Facebook and 1 Apple. Further analysis shows the risk allocation is imbalance.
If I want to Buy Amazon, I need to delay few months till enough money on hand only can top up. Once you accumulated enough money to buy, for that month alone you may just be able to buy 1 x Amazon, because 1 unit already cost $3500. causing no more capital to allocate to other shares. So your risk diversification is sucks, because now 100% of your money is into Amazon share. What if Amazon share price temporary going down? Your portfolio will be affected badly.
Risk Analysis: higher
Comment: Imbalance portfolio allocation. This is an unhealthy diversification.
Buying via fractional share method
Calculation are done based on your budget
Now you can now easily allocate $250 to Apple, $250 to Facebook, $250 to Google, $250 to Amazon. Your portfolio risk diversification is very balance.
Scenario 2: Topup lesser amount due to unexpected event
* FB earning surpass expectation, gap up to $320
Your top up at this month: $600 only (due to unexpected event )
* pay children education bill, emergency car break down, COVID nineteen causing temporary salary cut, ….
Now, you might thinking to postpone your plan, because the moment you want to deposit, Facebook already fly up to $320 per share, causing you only can buy 1 unit instead of 2, you are stuck..
You might also end up:
a. Give up on Facebook for this round, spend all the money to buy into Apple share.
b. Wait for the next funding top up, then only proceed to buy Facebook share.
c. Falling into the trap of changing plan, switch to buy other cheaper stock at lower quality, which you thought it is good because the newspaper say so, and you feel better because buying at lower price allowing you to buy the complete unit, and you can own more quantity.
Buy share through the normal way
Risk Analysis: higher
Comment: This kind of portfolio allocation is imbalance. The remaining balance $174 is not enough to buy anything…
Buying via fractional share method
Calculation are done based on your budget.
You can now easily allocate $150 to Apple, $150 to Facebook, $150 to Google, $150 to Amazon.
Risk: equal
Comment: The portfolio diversification and risk allocation is perfectly equal.
Now you see the main benefit of fractional share investing?
You can scale dynamically, doesn’t matter whether your fund is big or small.
You are getting the same %
top up $10,000, you can allocate 25% to each share
top up $700, you can allocate 25% to each share too!!!
top up $100, you can allocate 25% to each share!!!
What Strategy You Can Use?
a. Dollar Cost Averaging (every month top up)
Benefit of using DCA method is you don’t have to chase the stock price, and won’t be affected by emotional buy. Instead of putting the money at CD / FD, put it here! Use this strategy to accumulate for retirement, as well as preparing some saving for your kids.
My illustration at Scenario 1 and Scenario 2 above shows having small capital is no longer a barrier. Your top up amount is fully flexible and scalable.
b. Pending order (waiting for pullback)
When these company share price beaten down by scandal, lawsuit, temporary weak forward guidance, stock market crash, this the time we go in to happily buy. Promotion! Mega sale!
7 Benefits of Buying Fractional Share
- Better diversification
- Start with as little as $1
- Owning super good quality stock
- Collect dividend like actual share
- Enjoy stock split like actual share
- Suitable for retirement planning
- Dollar Cost averaging (avoiding emotional buy sell)
- Promote smart saving habit (doesn’t matter whether you topup $100 or $1000, you can manage risk easily)
Why Fractional Share is better than Mutual Fund and ETF?
For some reason, I’m not a fan of ETF or mutual fund, why?
The fund managers have to abide to the fund management rule, even they know these big TECH stock is performing well and going to perform very well in next 10 years, they can’t do anything.
their portfolio can’t restrict to 4 stocks, they need to diversify into a big basket of 10-20 stocks.
of course, they do this so that when got catastrophic event, they are not to be blame, because they won’t cause their clients to incur huge loss.
but this strategy actually causing their portfolio return can’t have amazing rate of return.
it’s rare to see a fund having 50% to 100% return
How to buy fractional share inside Interactive Brokers?
First, you must enable Permission to trade Fractional Shares.
Then you can fill in Shares quantity is fraction, or fill in USD amount directly. If this is a normal top up purchase, just select Limit order.
If this is an order to buy at mega sale, waiting to buy at discount, then at Order Type, set Good Till Cancel, and the Price set to lower, example, 3310.00
Frequent Ask Questions
If the share market cap is big and average daily volume is high, you can easily sell it off. The stocks I invest in are big TECH stock with high liquidity, selling offer is just a matter of 1 second.
No, I use it solely for investing.
For US citizens, you have many choices. Fidelity, Interactive Brokers, M1 Finance, Robinhood, DriveWealth Stockpile.
For clients outside of US, just use Interactive Brokers
I highly recommend Interactive Brokers simply because one trading account cover everything you might need for future. You can use IBKR to trade in global share markets, forex, futures, etf, metal, bond, etc.
Yes, of course. US stocks listed on NYSE, AMEX, NASDAQ, ARCA, or BATS, as well as OTC Pink U.S. penny stocks with average daily volume above $10 million and market cap above $400 million are available for fractional shares trading.
Click here to view the updated list of stocks available for fractional share trading.
If you enter an order using shares quantity, a minimum of 0.0001 share must be entered.
If you enter an order using USD amount, a minimum of 1 USD must be entered.
Of course. In fact, fractional share investing is a brilliant idea for Dollar Cost Averaging Strategy and Pending Order Discounted Buy Strategy.
Not only you can own super good quality company like Amazon, Google at very minimal capital, you can enjoy all the benefits of dividend and stock split.
From an investor point of view, the only downside I can see is when you want to change broker. You can’t use DTC to transfer out the stock to another broker, why? Because they are fractional, not in full unit. You either make it into a at least 1 full unit, or sell it off.
Yes, use Interactive Brokers. Read these few articles.
For bitcoin, you can use crypto trading platform. A Bitcoin is divided into 8 decimals. 0.00000001 BTC is the smallest you can buy.
Conclusion
Fractional share investing strategy allow me to buy top notch TECH stock without capital concern. I have pending order at 10-15% low from the latest high for stock like Amazon, Google, Facebook, Microsoft.
My Pending Order Strategy:
When they pull back to this level, I will add in my first batch. The more they drop, the more I buy. If they drop 30%-50% due to short term crisis… I will find extra fund to go all in 🙂
Warning: Only go all in when you know the company you are buying is currently earning huge net profit and going to continue earning huge net profit in future.
