One recent innovation in the investing scene today is fractional shares. As its name suggests, we are no longer required to invest in one whole share, and instead, we can invest in a fraction of a share – for a fraction of the cost.
This is great news for retail investors as no stock is too expensive to invest in now. Even if we do not have a lot of money to begin with, we can gain exposure to many different companies that we want.
This is a far cry from investing in SGX stocks – where we need to buy in lots of 100 shares (recently reduced from 1,000 shares) – and even Hong Kong-listed stocks – where lots of several hundred shares are required based on the company.
In Singapore Syfe Trade and Interactive Brokers are the main brokerages offering fractional shares trading. While Syfe Trade offers fractional shares for the U.S., Interactive Brokers offer the U.S. and European markets. Do note that not all shares will be eligible for fractional investing.
Read Also: Investing With Syfe: 7 Things You Need To Know About This Singapore’s Robo-Advisor
How Does Investing In Fractional Shares Work?
Investing in fractional shares is a relatively simple concept. Instead of buying a whole share, we only buy a fraction of it – which could be half, one-third, or the fraction that we can afford with our funds.
Let’s take one of the most popular shares in the world as an example: Apple. Apple shares are trading at around US$170 today. If we want to buy one Apple share, we have to pay US$170 (and other relevant transaction costs).
With fractional shares, we can buy half an Apple share for US$85 (half its cost) or even 10% of an Apple share for US$17. Or, we could also buy a fraction of the share that our available funds can afford – with US$100, we can buy about 0.58 of an Apple share.
Read Also: Investing With Interactive Brokers (IBKR): Here’s What Investors In Singapore Need To Know
What’s The Benefit Of Investing In Fractional Shares?
#1 Gain Only The Exposure You Want
The main benefit of investing in fractional shares is that we don’t have to buy an entire share to gain the exposure we want.
One of the most famous examples we can find on the internet is for investors who want to buy Berkshire Class A shares. In case anyone does not know, they’re trading at over US$440,000 per share today.
Yes – you read that right! It’s safe to say that not many of us can invest in Berkshire Class A shares.
Source: Google Finance
Of course, some of us may be familiar with Berkshire Class B shares, which are trading at US$300 a piece – that’s more affordable. Disregarding this, we can instantly see why investing in fractional shares can be so powerful, we can gain exposure to companies that we never could in the past.
#2 Build And Diversify Your Own Mini-Portfolio
As a concept, fractional shares are not new – even for retail investors like us. If we’ve ever invested in an ETF or unit trust, we would have gained exposure to several hundred stocks for as little as a few hundred dollars. This means that our exposure to each stock within the ETF would have been fractional.
With ETFs, we are given the portfolio that we can invest in. Fractional shares give individual retail investors the flexibility to build our own mini-portfolios and invest in as many or as few components as we want.
Imagine we are starting out with $1,000 and want to invest in only the six biggest companies on the U.S. stock market:
| Biggest Companies In The U.S. | Approx. Share Price (As of 25 August) |
| Apple | US$170 |
| Microsoft | US$275 |
| Alphabet (Google) | US$115 |
| Amazon | US$135 |
| Tesla | US$300 |
| Berkshire (class B shares) | US$300 |
| Total | US$1,295 |
In total, we would still need about US$1,300. While this is not a million miles away from our US$1,000 example, the point is that investing in fractional shares allows investing to build our own mini-portfolio.
In both instances – investing in ETFs or building our own mini-portfolios – we are able to gain valuable exposure to companies that we may never have if we invested in them individually. The brokerage cost of investing in an ETF would have been very affordable. Now, brokerages that offer fractional shares are also offering affordable brokerage costs to go along.
#3 No Difference In Returns That You Earn
Despite investing in a fraction of a share, we get to enjoy the same returns relative to our position size. If a stock goes up by a certain percentage, it does not matter that we own less, our position also increases by the same percentage.
The same goes for corporate actions. If the company pays a dividend or issues more shares (i.e. goes through company splits down the line), we are also entitled to all of it.
However, do note that we should also read the terms and conditions. For example, Interactive Brokers states that the dividend rate is 75% – which means we only get 75% of the dividends we are entitled to.
In addition, we may not have our voting rights or be able to receive full shareholder communications provided by the companies that we invest in.
#4 Dollar Cost Average Into The Markets
For many retail investors, we may only be setting aside a few hundred dollars each month towards investing. If we have positions in several individual stocks, it will be very difficult to invest in the stocks at regular intervals and evenly distributed across our investments.
With fractional shares, we can easily dollar cost average into our positions each month.
How Much Is The Brokerage Commissions When You Invest In Fractional Shares?
As mentioned, Syfe Trade and Interactive Brokers are the main players in fractional shares trading in Singapore. Hence, we can take reference to their brokerage commission costs.
For example, Syfe Trade charges the same low brokerage commission whether we are investing in full shares or fractional shares. Currently, Syfe Trade offers two free trades each month, and charges US$1.49 per trade thereafter.
Let’s say we wish to invest in 0.75 of each Alphabet (Google) share. The US$1.49 brokerage charge will translate to about 1.7%. While this may seem relatively high, it does not come with any minimum brokerage cost.
Similarly, we can invest in fractional shares with Interactive Brokers. They too state that they offer the same commission cost structure when we invest in fractional shares. Interactive Brokers charges a minimum of US$1 per trade (and a maximum of 1% per trade).
In the same example, if we buy 0.75 of an Alphabet (Google) share, the brokerage commission will be 1% of the trade – or approximately US$0.87.
Note that these are just brokerage costs, and there are other cost components that may factor into your decisions as well.
Read Also: Singapore Online Stock Brokerage Account Fees Comparison (2022 Edition)
What Are The Downsides To Owning Fractional Shares?
As mentioned, only a few brokerages offer fractional shares trading in Singapore. If we want to embark on fractional share trading, we need to open an account with either Interactive Brokers or Syfe Trade.
Even if a brokerage offers fractional shares, not all shares are available. As mentioned, Syfe Trade offers fractional shares for only U.S. stocks, while Interactive brokers offer U.S. and European markets. However, even within these markets, there may be some counters that are not offered for fractional share trading.
The fractional shares that we buy will be stored in our custodian accounts. On its own, this is not so different from how we would be storing our other U.S. or European investments. However, the one drawback with fractional shares investing is that we typically cannot switch out from existing brokers.
We’ve also highlighted that brokerage commissions can be about 1% of our investments. This can be quite high, compared to investing a larger amount – where brokerage commission costs can be as low as US$0.005 per share on Interactive Brokers or US$1.49 per trade.
Also mentioned in the article, we may not get our full entitlement for dividends, and may not receive investor documents from the companies that we invest in.
Finally, and going back to one of our first points, the reason why Berkshire Hathaway’s Class A shares are so expensive is that Warren Buffett thinks that a high share price attracts investors who think about the long-term. This is a good warning for any new or inexperienced investor who believes that they can trade fractional shares just for short-term profit.
There are both pros and cons to investing in fractional shares. Nevertheless, it is an extra option we have to gain exposure to companies we may not be able to in the past. In that regard, having the option is always a better thing than not having the option.
Companies Understand The Value Of A Lower Share Price Too
The current share prices for these technology giants listed above are all post-stock splits in recent years. For example, Alphabet (Google) shares split 20-to-1 in July 2022. If the split hadn’t taken place, each of its shares would be trading at US$2,300.
The same thing applies to Amazon, which split its shares 20-to-1 in June 2022. Tesla has also split its shares twice since 2020. Apple has split its shares five times since its listing.
This would have made investing in fractional shares of these companies more valuable. Nevertheless, there are mainstream companies today that still have share prices above the US$1,000 mark. One example was Class A shares for Berkshire Hathaway. Other examples include Booking Holdings (Booking.com) – trading at US$1,990 – as well as Chipotle Mexican Grill – trading at US$1,650. Of course, there are others too.
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