What Are Fractional Shares? - InvestingChannel

What Are Fractional Shares?

Proprietary Data Insights

Top $100-Plus Stock Searches This Month

Rank Name Searches
#1 Tesla 370,097
#2 Apple 342,773
#3 Nvidia 333,451
#4 Amazon.com 260,705
#5 Costco 211,722
#ad It’s time you learn about Alternative Investments!

What Are Fractional Shares?

The top $100-plus per share stocks in our Trackstar database are also the top stocks investors search for across all stocks, setting price aside. 

We hope this means they’re also the ones that everyday, do-it-yourself retail investors own or have owned. Because, over the long-term, all five of these names have crushed it. With the exception of Apple (AAPL) and Tesla (TSLA), they have also crushed it (or done really well) in the near-term. 

That said, The Juice has been buying and selling stocks since we were tiny pieces of pulp. And, time and time again, we’ve seen investors (present company included) not buy a stock because the share price was too high

This makes no sense. 

Charles Schwab does a nice job starting the conversation for us:

OK, so you can only afford a few shares of an expensive stock. Ask yourself: Given the price per share, how many do you really need? Five shares? 10 shares? How about 25, 50, 100, or more?

… most market strategists agree, you don’t necessarily need 10 or even 100 shares to see potential results—it depends on how the stock moves. Some stocks are more volatile than others. An active, expensive stock might clock a higher overall percentage gain than lower-priced stocks, regardless of the quantity.

Exactly. While Schwab explains how to use options to spend less capital on expensive stocks and how P/E ratios help determine — more than share price — if a stock is expensive, we’ll focus on an example and how to use fractional shares. 

Because, as we focus on retirement in 2024, this matters. 

One of the biggest impediments to retirement saving — and starting it early — is the idea that you don’t have enough money to invest. This probably isn’t true. 

Consider two strategies to invest in high-priced stocks that might just deserve a place in your portfolio. 

Consider Costco (COST). It started the week at around $683 per share. Because of the special dividend it announced last month, the stock cracked the Trackstar top five and has had a volatile last month. 

If Costco announced a 10-for-1 stock split tomorrow, it would trade for roughly $68.30 a share. 

This does nothing to the value of your investment. If you owned 100 shares of Costco at $683, for a value of $68,300, you would own 1,000 shares of Costo at $68.30, for a value of $68,300, after the split. 

If you don’t own Costco, you might hesitate to buy it at $683 because you can’t afford that nice round, psychological number of 100 shares. But you might jump at the chance to buy 100 shares of $68.30. It’s this perception of share price that factors into some companies’ decisions to execute a split. Amazon.com (AMZN) and Tesla both recently split, in part, for this reason. To attract retail investors with a less intimidating stock price. 

But, here’s the thing: Had you bought one share of COST at $469 one year ago, you’d own one share of COST at $683 (or so) today. Actually, you’d own more if you reinvested dividends, but we’re creating a clean example for illustration here. This represents nearly 46% worth of upside. 

If you drove by a Wendy’s (WEN) on your way to Costco last January, then looked up the stock price, you could have purchased WEN for just over $22 per share. 

At the time, 100 shares of WEN would have set you back $2,200. 

Today, with WEN trading at approximately $19.50, you’d have $1,950. That’s more than 11% worth of downside. 

But the thinking back then that, again, many investors have is, with $2,200 I can get 100 shares of WEN, but only 4.7 shares of COST so I’m better off with 100 shares than I am with 4.7 shares.

Obviously, this was wrong. 

You would be better off — in this example — buying any amount of COST you can afford and avoiding WEN. And even if you didn’t have $469 to spend last year, you could have purchased Costco stock through pretty much any brokerage platform. Fractional shares have helped revolutionize investing for small investors. And they don’t require a huge explanation. 

You have $250 sitting in cash in your account. One share of COST costs $683. Assuming no commission (also common), that $250 gets you 0.366 shares of COST. Make that type of purchase as often as you can and, before you know it, you have a nice little chunk of change sitting in COST that compounds if you choose to reinvest dividends. 

So, it’s actually three strategies — fractional shares, dollar cost averaging (which we explain here) and dividend reinvestment (which we explain here). Put them together and you have a coherent strategy to build a portfolio that can stand the test of time. 

The Bottom Line: We’re building a nice little investing library here at The Juice. Today’s installment and the links in it go a long way to demystifying investing in general and investing for retirement. 

None of this is to say there’s no value in low-priced stocks. Obviously, there can be. But it is to say that you should focus on buying high-quality companies in any quantities you can afford, not how many shares you can accumulate based on share price.

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