Brokers

I Wouldn’t Open a Brokerage Account That Didn’t Offer This Feature

I’m a fan of investing money because, over time, you could turn a relatively small sum into a much larger one. One of the rules I like to stick to when investing is to always maintain a diversified portfolio.

There’s a reason for that. A diversified portfolio doesn’t guarantee you success, nor does it completely spare you from losses in the event of a stock market meltdown.

But the way I see it (and many financial experts agree), by maintaining a diverse investment mix, you’re lowering your chances of taking major losses every time there’s a market event. If tech stocks take a beating one week but they only comprise 15% of your portfolio, your losses are going to be minimized.

Similarly, by branching out in your portfolio, you can potentially increase your chances of seeing your investments gain value over time. Again, there’s no guarantee. But it’s a system that works for a lot of people, so it’s one I insist on.

For this reason, I made sure to open a brokerage account that offered the option to buy fractional shares. And you may want to do the same.

How fractional shares work

In many parts of the country, you can walk into a pizza store and buy a single slice of pizza if you’re not hungry enough to need a whole pie. Fractional shares work kind of similarly.

With fractional shares, you don’t need to purchase shares of stock in their entirety to add them to your portfolio. Rather, you can purchase shares in fractions — for example, half of a share, one-fourth of a share, or possibly one-fifteenth of a share — however it works out.

The nice thing about brokerage accounts offering fractional shares is that they allow you to build a diversified portfolio when you’re on a budget. That’s because if a given stock costs more than you can afford, or more than you want to spend, you can own it on a fractional basis.

Take Chipotle, for example. You may decide to invest in it so you can add a restaurant stock to your portfolio. But at a current price of about $2,609 per share, that’s a lot of money to part with.

So let’s say you only want to invest $500 in Chipotle. If your brokerage account lets you buy fractional shares, you can use that money to purchase roughly one-fifth of a share.

Now, it happens to be that Chipotle is not a stock that pays a dividend. But if that were the case, you’d simply get one-fifth of the dividend it pays per share. Pretty simple, right?

A feature you don’t want to give up

Just as it doesn’t pay to invest in a brokerage account that charges ridiculous fees (such as those for inactivity — you should be able to take a break from buying or selling stocks as you so choose), so too do you probably want to avoid a brokerage account that doesn’t offer fractional shares. By giving that up, you may find that it’s far more difficult to build a diversified portfolio. And that could impede your success as an investor.

Thankfully, many popular brokerage accounts these days do let you buy shares on a fractional basis. But be advised that even if you’re only putting portions of shares into your portfolio, it’s still important to do your research — the same research you’d do when buying full shares of stock. After all, it’s still your money on the line. And a fraction of a share of a bum stock isn’t going to do your finances much good.

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