I don’t have a lot of money and I want to buy stocks. I heard about fractional shares where I can buy less than one share of stock in a company. Professor Erkis, what do you think?  Garrett F. ’24, College of Arts and Sciences.  

Fractional shares have exploded in popularity lately. Some of the most popular stocks are expensive on a single per share price. Amazon has recently been trading above $3,000 per share and Alphabet (Google) has a price near $1,500 per share. Apple and Tesla, both popular stocks, were also expensive on a per share basis before they recently “split” their stock. A stock split is when each existing shareholder receives multiple shares of new stock for each share they own. This lowers the price. For example, a two for one stock split would cut the price of the stock on a per share basis by one-half.

The high cost of a single share has led to most every brokerage offering the ability to purchase less than one share of stock, which is called fractional shares or stock slices. Fractional shares are helpful if a person wants to purchase a high-priced stock. For example, an investor could purchase one-tenth of a share of Amazon for $300 and still be able to participate in owning the stock. 

One of the things I, and many others, recommend for stock investors is owning many stocks. This is called diversification. Owning many stocks helps limit large gains and losses that can happen when owning a single stock. I advise investors to buy stocks to gain long-term wealth, not for short-term speculation purposes. Having many stocks helps limit risk since, as we all know, some companies we buy will do well and some will not. This is why I generally suggest beginning investors purchase a stock index mutual fund like the S&P 500, which gives investors the ability to own part of 500 large companies at one time. 

For those who don’t want to purchase an index fund and want to own company stocks directly, fractional shares can be used to diversify. Say an investor has $1,000 to invest and doesn’t want to buy a stock index mutual fund. That person could purchase $100 of fractional shares in 10 separate companies. This would provide diversification and help lower the ups and downs when stock prices change. This strategy is superior to just putting all of the $1,000 in a single stock and hoping its price goes up. 

My goal when investing is reasonable, long-term gains. Your portfolio will grow nicely with 5-8% returns each year. There is no reason to put all of your money in a single stock searching for huge short-term gains, but taking the risk of huge short-term losses. Learning how to responsibly invest for the long haul is a nice skill to learn in college when you have many, many years of investing ahead of you. 

Anna Lubomirski ’21: 

I think the most important thing to remember about investing is that it is supposed to be long-term, not short-term. Short-term speculating is not investing, it’s like playing the lottery where you have high risk and a small probability of success. Similarly, investing in a particular stock is extremely risky. It seems like a lot of work to buy a number of fractional shares in enough stocks to diversify. Therefore, I am more interested in the index funds, like the S&P 500, than individual stocks.