Fractional Investing Basics

When you place a fractional share order, your brokerage pools your order with other fractional orders to purchase whole shares, then allocates the appropriate fraction to your account. Some brokerages buy whole shares in advance and hold them in an omnibus account, distributing fractional portions as orders come in. Your fractional ownership is tracked in the brokerage's books, and you are the legal beneficial owner of that fraction of the share. This means you are entitled to proportional dividends, capital gains, and the same percentage returns as whole share owners. The process is seamless from the investor's perspective since the brokerage handles all the pooling and allocation behind the scenes.

The minimum investment for fractional shares is remarkably low at most major brokerages. Fidelity, Robinhood, Interactive Brokers, and Public all allow you to buy fractional shares starting at just one dollar. Charles Schwab requires a minimum of five dollars per fractional trade. M1 Finance requires a $100 account minimum but then allows fractional investing with no per-trade minimum. Some brokerages also offer round-up investing features where spare change from purchases is automatically invested in fractional shares. The low minimums make it possible for anyone to start building a diversified stock portfolio regardless of their income level.

Most major brokerages that offer fractional shares charge zero commissions for buying and selling, just like their whole share trades. However, there are some indirect costs to be aware of. Some brokerages earn revenue through payment for order flow, which may result in slightly less favorable execution prices on your trades. Fractional orders may also be executed at a slightly different time than market orders for whole shares since some brokers batch fractional orders at set intervals. If you use a platform like Acorns that offers round-up investing, there is typically a monthly subscription fee of three to five dollars. Always read your brokerage's fee schedule carefully, but for standard fractional trades at major brokers like Fidelity, Schwab, or Robinhood, the direct trading cost is zero.

Fidelity stands out as one of the best options because it offers fractional shares for over 7,000 stocks and ETFs with a one-dollar minimum and zero commissions. Charles Schwab offers Schwab Stock Slices for S&P 500 stocks with a five-dollar minimum. Robinhood provides fractional investing for thousands of stocks starting at one dollar with a simple mobile interface that appeals to beginners. M1 Finance is excellent for automated investing with its pie-based allocation system that automatically rebalances fractional positions. Interactive Brokers offers fractional shares globally, including international stocks, making it ideal for investors who want worldwide diversification. The best choice depends on your needs for research tools, available investments, and platform features beyond just fractional trading.

In most cases, fractional shares cannot be transferred between brokerages through the standard ACATS transfer system, which only supports whole share transfers. When you initiate a brokerage transfer, your whole shares move to the new account but fractional portions are typically liquidated and the cash proceeds are transferred instead. This forced sale could trigger a taxable event if the fractional shares have gained value. Some brokerages like Fidelity have introduced the ability to receive fractional shares in transfers, but the sending brokerage must also support it. Before switching brokerages, check both firms' policies on fractional transfers and consider the tax implications of any forced liquidation of your fractional positions.