Here’s a common problem for first-time or more passive investors.
They’re interested in buying a blue-chip or red-hot tech stock.
But each share trades at a price they think they can’t afford.
Maybe you’re an investor who wants to start investing with $500 today.
But this week, Amazon (AMZN) shares cost more than $3,200 each.
Alphabet (GOOGL) – the parent company of Google – stock costs more than $2,300 per share.
Or take Domino’s Pizza (DPZ). One of the most popular pizza-delivery companies of all time traded for $426.25 (and higher) as of this morning.
You likely think you’re priced out of the first two stocks above.
And you’d only be able to buy one share of the pizza company with that initial investment. It sounds like a raw deal and it’s one reason people believe that you need a lot of money to start investing.
Well, there is a solution.
It all starts… as it should… with a pizza.
How About a “Slice” of Domino’s?
Domino’s Pizza has been around since 1960. It’s best-known for its pizza.
But it should be known for its delivery. The company’s innovations in food delivery are precursors for technologies used today by Uber Eats, GrubHub, and many other companies. For example, Domino’s recently built a massive innovation center to create and test new delivery systems to get pizza to you faster.
Don’t laugh. It’s true.
Shares of Domino’s Pizza have been on an incredible run over the last few years. The company’s stock is up from nearly $200 at the start of 2018 to more than $426 just three and a half years later. That’s a 113% return in about 41 months.
Now, if you started with $500 and bought two shares in 2018, your gains would be enough to order enough pizza for a typical child’s birthday party.
Two years later, you can only buy one share… right?
Well, thanks to innovation elsewhere in the markets, investors can now buy something known as fractional shares of a company. It starts with a brokerage that purchases whole shares of a stock on the market. They then cut the stock into whatever fractions their clients want and keep that division noted on their books.
Think of each stock as a pizza. You can purchase based on a percentage of a share — or a dollar amount — instead of buying an entire share.
So, you could purchase $500 of Domino’s stock and obtain roughly 1.17 shares of this company. Now, instead of leaving nearly $85 on the sideline in your brokerage account, you can put that money to work and earn both dividends and appreciation upside by investing that capital.
Or, in the case of Amazon — trading north of $3,300 — you could put $20 or $200 into fractional shares of this leading e-commerce company.
Fractional shares give you the ability to buy a stock that you couldn’t previously afford. In addition, you can slowly build a diverse portfolio, stretching your stake across various companies.
As I noted on Monday, dollar-cost averaging is a unique way to build an individual position or a broader portfolio.
Let’s look at some other pros and cons of fractional shares.
Pro: Build a Portfolio as You Learn to Invest
With dollar-cost averaging, you could allocate $5, $100, or $500 per month to the stock or stocks of your choice. So, if you’re just starting to invest, you can set money aside on your schedule, invest in your favorite companies, and build a nest egg at your own pace. You don’t need a lot of money to get started, and you can generate income off your principal.
Pro: Accessible on Many Different Brokerages With Zero Fees
Fractional shares are available in many different forms at many brokerages. Robinhood, for example, was the first broker to offer commission-free trading. The brokerage platform also implemented new features like fractional-share investing and automatic dividend reinvestment.
Meanwhile, firms like Stockpile allow investors to purchase fractional shares as a gift for family and friends. It’s like a gift card that can be used for fractional shares or ETFs (with certain fees). Other options include Stash and Public.com
Con: You Might Not Be Able to Transfer Fractional Shares
The primary challenge with these brokerages is that you may not transfer them to a different broker. Typically, it’s easiest to transfer entire shares, meaning that you might have to sell them and transfer the cash. This can create uncertainty with capital gains taxes, an uptick in fees, and other costs you might not know about today. Therefore, it’s essential to read all of the documentation if and when you trade fractional shares.
Con: You Can’t Invest in Many Foreign Companies
In the United States, fractional shares have gained popularity. However, they remain elusive in Europe, Japan, and other markets. So, you may not have the option to buy some of the bigger competitors of the U.S. companies.
Fractional shares are a remarkable way to buy more than a whole share and ensure you can generate additional income and appreciation upside with your money. It’s also a great way to own the companies that you want to own on your terms.
Here’s my favorite part: fractional shares allow you to buy great businesses at an affordable price so that you can keep your portfolio balanced (risk-adjusted) and not be overleveraged in any one position.
I will beat that drum hard… all the time. Do not put too much money into only one position. Fractional shares are a perfect way to put just the right amount of money into each position you enter.
On Monday, I’ll show you another way to buy the stocks you want to own at the price you want to pay. It’s a great strategy, and one that can help you generate additional income off stocks.