How to invest using fractional shares

Understanding fractional shares

Fractional shares represent ownership of less than one full share of a company's stock.

Rather than needing hundreds or even thousands of pounds to purchase a single share of high-priced companies like Berkshire Hathaway or Nvidia, fractional shares allow investors to buy a portion of a share based on the amount they wish to invest.

For example, if you want to invest £50 in a stock that trades at £500 per share, you would own 0.1 shares, or 10% of one full share.

This has transformed accessibility in the stock market. Historically, investors needed enough capital to purchase at least one whole share of any stock they wanted to own, creating significant barriers to entry, particularly for younger investors, those with limited capital or anyone wanting to diversify across multiple expensive stocks.

Fractional shares eliminate this barrier by allowing investors to specify a specific amount rather than a number of shares, making it possible to build a diversified portfolio regardless of account size.

The concept works simply: when you purchase a fractional share with us, you own a proportional piece of that share with all the benefits that come with it. If you own 0.5 shares of a company and it pays a dividend, you receive half of what a full shareholder would receive. Similarly, if the stock price increases by 10%, your fractional holding increases by the same percentage.

The ownership is legitimate and legally protected, just like owning whole shares, though you often can’t vote on company matters.

Fractional shares became widely available to retail investors in the late 2010s as fintech companies and traditional brokerages recognised the demand for more accessible investing options. Today, most major brokerages offer fractional share investing, though availability varies by platform.

Investing with fractional shares

Fractional shares open up numerous strategic possibilities for investors of all experience levels.

One of the most popular approaches is building a diversified portfolio that mirrors professional allocations without requiring large amounts of capital.

Using fractional shares, an investor with just £500 can create a portfolio containing pieces of 10 or even twenty different companies across various sectors, achieving diversification that would previously have required tens of thousands of pounds.

Dividend reinvesting also becomes significantly more efficient with fractional shares. Rather than accumulating dividends in cash until you have enough to purchase another full share, fractional investing allows every dividend payment to be immediately reinvested, purchasing whatever fraction of a share your dividend amount will buy.

This maximises the compounding effect of your investments and ensures that no capital sits idle waiting to be deployed. Over decades, this difference can amount to substantial additional returns.

Risk management strategies also benefit from fractional share capabilities. Investors can maintain precise portfolio weightings, ensuring that no single position grows to represent an outsized portion of their holdings.

If a particular stock appreciates significantly and becomes 15% of your portfolio when you intended only 10%, you can sell just the fractional amount needed to rebalance back to your target allocation. This granular control was previously impossible for investors who could only trade in whole share increments.

Thematic investing also becomes more accessible through fractional shares. If you believe in the future of renewable energy, artificial intelligence or biotechnology for example, you can create a personalised basket of leading companies in these spaces without needing thousands of pounds.

You might invest £20 each in 10 different companies representing a theme you believe in, creating a focused portfolio that aligns with your convictions and risk tolerance. This approach allows for experimentation and learning without committing excessive capital to any single idea.

For those interested in copying the portfolios of famous investors or following professional investment strategies, fractional shares also make replication more feasible. When Berkshire Hathaway discloses its holdings each quarter, investors with limited capital can now build a miniature version of its portfolio, gaining exposure to his investment philosophy and stock selections.

Similarly, you can recreate allocations from successful ETFs or mutual funds using individual stocks, potentially saving on expense ratios while maintaining similar diversification.

Common mistakes

Despite the accessibility and benefits of fractional share investing, several pitfalls can undermine your success if you're not careful.

One of the most common mistakes is over-diversification, where investors spread their capital too thinly across dozens of different stocks. While diversification is important, owning fractional shares of 50 companies with a small account can make it nearly impossible to track your investments effectively or understand what's driving your returns.

A more concentrated portfolio of between 10 and 20 well-researched companies typically makes more sense for most individual investors.

Another frequent error is neglecting transaction costs and fees. While we now offer commission-free trading for fractional shares, some platforms charge fees for certain order types, account maintenance or specific services. These costs can accumulate quickly when making frequent small purchases, potentially eroding your returns over time.

Many investors fail to consider the tax implications of frequent trading with fractional shares. The ease of buying and selling small amounts can encourage excessive trading activity, generating short-term capital gains that are taxed.

Overlooking the importance of research and due diligence is another common trap. The low cost of entry with fractional shares can create a false sense that individual purchases don't matter much, leading some investors to buy stocks without proper analysis. Whether you're investing £10 or £10,000, the quality of the companies you own matters.

A poorly performing investment will lose you money regardless of the amount invested, so maintaining standards for what enters your portfolio remains essential.

Future of fractional share investing

The fractional share landscape continues to evolve, with new features emerging regularly. Looking ahead, we can expect expanded availability across more securities, including potentially fractional ownership of bonds and other investment vehicles currently restricted to whole unit purchases.

Some platforms are already experimenting with fractional shares of exchange-traded funds and other diversified investments, further improving accessibility for small investors.

The regulatory environment surrounding fractional shares will probably develop further as these investment vehicles become more mainstream. Currently, fractional shares exist in a somewhat grey area regarding certain shareholder rights and protections.

As more investors hold significant wealth in fractional positions, clearer regulatory standards for how these assets should be treated during corporate actions may emerge.

For your personal portfolio, fractional shares should be viewed as a tool that allows for better investing practices rather than a revolutionary change in investing philosophy.

The fundamentals of successful investing remain constant: invest regularly, diversify appropriately, minimise costs, think long-term and focus on quality companies. Fractional shares simply make it easier to implement these principles with less capital and greater precision.

Whether you're just starting your investment journey with £20 or managing a substantial portfolio, fractional shares simply offer more flexibility and control.

As you move forward with fractional share investing, remember that the goal isn't to own as many different stocks as possible or to constantly trade in and out of positions. Rather, the objective is to build a portfolio of quality companies that you understand and believe in, with proper diversification across sectors and investment styles.

Pros and cons of fractional shares

As with all investing strategies, fractional shares have their own unique set of advantages and drawbacks.

Pros of fractional shares

• Improved accessibility — allows investors to purchase shares of expensive stocks with any amount of money, removing the traditional barriers that prevented small investors from owning pieces of high-performing companies like Amazon, Google or Berkshire Hathaway
• Better diversification opportunities — enable investors to spread even small amounts of capital across multiple stocks, sectors and investment strategies, reducing concentration risk and building more balanced portfolios regardless of account size
• Easier implementation of pound-cost averaging — through automated recurring investments that purchase fractional shares at regular intervals, helping investors benefit from market volatility without needing to time purchases or save up for full shares
• Precise portfolio allocation — allows investors to deploy capital exactly as intended without having leftover cash sitting idle, since every pound can be invested proportionally across chosen securities
• Lower psychological barriers — expensive stocks feel more attainable and reduced intimidation factor that sometimes prevents new investors from entering the market

Cons of fractional shares

• Limited transferability between brokerages — fractional shares often can’t be moved to another platform without selling them first, potentially triggering unwanted tax consequences and limiting your flexibility to change platforms
• Potential liquidity constraints — during extreme market conditions or with less popular shares, as fractional share orders may be harder to execute quickly or at desired prices compared to whole share transactions
• Reduced voting rights — aggregate fractional shares can sometimes be counted, but often this simply isn’t possible
• Complex corporate action handling —stock splits, mergers or spin-offs can be managed differently by various brokerages and may occasionally result in fractional positions being liquidated without your input
• Limited availability — not all stocks may be available for fractional purchase depending on your platform, with some restricting fractional investing to certain popular stocks or index constituents

Fractional shares summed up

• Fractional shares allow investors to purchase portions of stocks with any amount, democratising access to expensive stocks and enabling portfolio diversification regardless of capital available for investing
• Getting started requires choosing a brokerage offering fractional shares, funding your account, and placing pound-based orders rather than share-quantity orders
• The primary advantages include improved accessibility and diversification, easier pound-cost averaging and precise portfolio allocation, while disadvantages involve limited transferability, potential liquidity issues and complex corporate action handling
• Successful fractional share investing requires avoiding over-diversification, understanding fee structures and tax implications, conducting proper research on investments and viewing fractional shares as tools to implement sound long-term investment strategies