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Fractional trading means buying fractions of a share rather than an entire share. With that, you could buy a tenth of a Microsoft share instead of a full one.
Until recently, fractional trading was quite limited in shares you could trade like this. But now, we can even trade fractions on the Swiss stock exchanges.
So, should we use fractional trading? Are there disadvantages or advantages to it? This is what we will find out in this article.
Fractional trading is extremely simple: you buy a fraction of a share instead of a full share.
Despite being extremely simple, it is a very recent feature. Interactive Brokers was the first major broker to allow fractional trading in 2019. After that, most major brokers quickly followed, and it is now straightforward to trade US stocks in fractions.
Fractional trading is a feature of the brokers, not of the stock exchange itself. First, the broker must buy a full share of the market. Then, the broker will sell parcels of this full share to its customers.
When investors are selling fractions, they go back into the broker. Once the broker has some full shares, it can sell them back to the exchange or keep them.
When you invest in fractions, you will still get the dividends prorated to the fractions you own. If the dividend is 10 USD per share and you own 0.25 of a share, you will receive a 2.50 USD dividend.
With most brokers that allow it, fractional trading is as simple as trading a full share.
Advantages of fractional trading
There are several advantages to fractional trading.
The main advantage is that you can afford to buy any stock regardless of price. If a stock trades at 3000 USD and you only have 1000 USD to invest, you could buy a third of the stock. You could even buy a tenth of it.
Many users used that strategy to buy Amazon stocks before they did a stock split in 2022. At that time, Amazon stocks sold at more than 2000 USD each.
Another advantage is that this can help diversification. If you are building a portfolio of single stocks but do not have money, trading in fractions will allow you to have many stocks, each with small fractions.
Some people also argue that this helps returns since you can invest as much as you want. For instance, if you have 150 USD to invest this month but your ETF is 100 USD, you could buy 1.5 shares and have no cash left. I do not think this is significant enough to be an advantage.
Disadvantages of fractional trading
On the other hand, there are also some disadvantages to trading in fractions.
The main disadvantage of fractional trading is that it encourages you to trade more frequently. Frequent trading has two disadvantages itself.
First, you will pay more in fees if you trade too frequently. In most cases, buying an entire share is cheaper than buying twice half a share.
More importantly, frequent trading in small sums will encourage many investors to turn to active investing and follow trends. In practice, passive investing is much better for most investors.
Therefore, I recommend against trading too frequently and in small bets just because you can. You should use fractional trading for long-term investing!
Another disadvantage of fractional trading is that transferring fractional shares from one broker to another is generally impossible. In that case, if you want to transfer your portfolio, you must sell the fractional shares and transfer the money yourself.
Trade in fractions of US Stocks
Interactive Brokers started allowing fractional trading in 2023. IB was the first major US broker to do so. It allows trading in most stocks in the United States and European markets.
There are some limitations. For instance, penny stocks could not be split further up. But generally, Interactive Brokers is very feature-complete when trading in fractions.
The fees are the same for trading in fractions as for trading full shares.
With IB, you need to enable fractional trading in your account permissions. Then, you can start trading fractions like you would be trading full shares.
Currently, IB does not offer to trade in fractions of Swiss stocks. So, if you need this feature, you must look at another broker.
Trade in fractions of Swiss stocks
Yuh is an easy and affordable way to invest in the stock market and spend money abroad.
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- Low fees for small operations
- Fractiona trading in stocks
Until recently, there were few ways to trade in fractions in Swiss shares. Currently, Yuh offers fractional trading by default on all major Swiss stocks.
Fractional trading is directly enabled by default and for all shares. You do not need to do anything special to start trading in fractions with Yuh. This is one major advantage of Yuh if you are getting started.
It is essential to mention that Yuh does not offer access to all Swiss stocks but only to a subset they select. This means you cannot trade in fractions in each stock. But if you find a missing stock, you could ask them to integrate it.
It is also important to mention that there is a minimum fee of 1 CHF for each trade. So, if you make many trades with small fractions, it may start to be costly.
Fractional trading is a very simple way to start investing with little money. This feature has a few disadvantages, and nothing fundamentally wrong with it.
However, you need to be careful not to use this feature as an excuse to trade very frequently and incur large transaction costs. Trading in fractions is excellent if you are getting started with small sums. But you should still invest for the long term and try to build wealth over time, not overnight.
If you are trading in fractions, I want to hear why and how in the comments below.
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