Fractional Trading: Should you do it?
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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
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.
This disadvantage also extends to broker bankruptcy. If your broker goes bankrupt, and you have fractional shares, you are unlikely to get back your fractional shares. You may only get the collateral that was deposited.
Trade in fractions of US Stocks
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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.
Conclusion
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.
Recommended reading
- More articles about Investing Fundamentals
- More articles about Investing
- What is the Efficient Market Hypothesis (EMH)?
- Exchange Traded Fund (ETF) Arbitrage – How does it work?
- Keeping It Simple – Book Review
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Hi Baptiste,
Thank you for the insightful article! If one prefers not to enable fractional trading, what are the best ways to invest the leftover cash that remains after purchasing whole shares?
For example, if I have a budget of $1,000 and buy 9 shares at $110 each, I would have $10 left uninvested. It feels like a missed opportunity to leave that cash idle. Are there any efficient ways to put the remaining cash to use (perhaps on IBKR), or is this simply something investors have to accept when trading whole shares as I guess the opportunity costs are rather low?
Thanks in advance for your thoughts!
Hi Jon,
I think it’s something investors have to accept. But if you keep it in USD on IB, you will get some interest rate at least. IB generally has good interest rate, so I would not worry too much about keeping some little amount uninvested.
Huge fan of your work!
I struggle to declare fractional shares on my Zurich tax return? I use their online tool. Any advice/insights? It’s holding me back from using it more.
Thanks, Pat!
Unfortunately, I don’t think I can help you. I have never had any fractional shares and I don’t live in Zurich. Have you asked the tax office how to enter fractions?
No. I ended up rounding up/down so as to track the total shares as best as possible. I should ask though!
This happens because of the share purchase plan from my employer, which I sell after 6 m and replace by ETFs.
If I were you, I would add a comment about the rounding, to avoid issues. But it sounds like a good idea if the software does not handle fractions.
Hi Baptiste
Long story
With the bankruptcy of Flowbank (where I dont hold anything) a question came up:
– a untrusty source on reddit said, you might not get fractional shares back , e.g transfer to another broker is not possible (as long you dont own a full share).
Red flag on my end: I use IBKR and invest through DCA monthly into ETFs. I purchase every month fractional shares
IBKR states following: https://gdcdyn.interactivebrokers.com/Universal/servlet/Registration_v2.formSampleView?formdb=4289
„Insolvency – In the unlikely event IBKR becomes insolvent, clients will still hold their fractional interest. However, if the appointed insolvency practitioner (or administrator/liquidator) cannot transfer fractional entitlements to another broker (or custodian) they may need to liquidate (sell) the fractional interest and return the monetary value to the client instead.„
It sounds like I am safe, however it‘s not 100 % clear to me
Coming back to Impact: I do own mostly full shares. E.g if you have 1000 of an ETF and 0.5 of a fractional share – I think I could live with the lost of 0.5 shares in worst case
However what popped into my mind and I hope you get the question through my dummy example: what if fractional shares stay fractional shares over time? Let‘s assume I purchase 12x 1.5 shares (12 months)
Does it technically now count as 18 Full shares on the broker?
Or do I hold 12 full shares and 12x 0.5 shares?
Obviously the GUi shows you 18 shares. But how is that made from a broker perspective?
If the source of Reddit is right plus my biggest night mare that the broker is keeping my fractional shares as fractional shares could cause a super melt-down
I know, risk is low, but still – if impact is high, I need to know
If you dont know the answer e.g. with a source, how can I get a good answer? Ask IBKr?
Thanks
Funky
Hi Funky
That’s a very good question. And yes, in general, fractional shares are less protected than full shares. In general, it’s not a huge deal, because people can live without the fractional part of their portfolio (18.5 could become 18, potentially plus some cash). I would not be surprised if the transfer of fractional shares was not possible in most cases.
As for your second question, it all depends on the broker. But for a broker, it is easier to deal with full shares rather than fractional shares. So, if you buy 0.5 + 0.5 shares, they will reconcile this into a full share, because it is easier for them to account for it.
Of course, they could theoretically keep 0.5 + 0.5, but it would complicate their life and they are very unlikely to do that.
I do not have a source for that. To be sure, you would need to validate that with your broker, but I would be really surprised if IBKR did not do it properly.
Just FYI: I opened a ticket with them 2 weeks ago, still no answer. When I have the answer (ever), I will share it here.
You don’t mind about this? I mean, it’s really unlikely, I agree, however: If they really make it complicated on their end and the super melt down happens, no one will be sorry ;-)
Yes, please share if you get one. I hope you get one.
I really don’t mind since I don’t use fractional shares. But I think it’s indeed an issue with bankruptcy.
TICKET RESPONSE(S):
1 Ticket Number: T493666 created on 22-Aug-2024
Initial Description: How does IBKR store fractional shares? (in case of bankruptcy)
Response from IBCS at 22-Aug-2024
Dear Mr. bEtTeR-yOu-aNonyMiZe-yOuR-nAmE,
Thank you for contacting IBKR Client Services. Please accept my sincere apologies for the delay in responding to your query.
Aggregated fractional shares will become full shares.
With regard to the assets in the ordinary account, funds and assets of Interactive Brokers U.K. Limited („IB UK“) customers are maintained at Interactive Brokers LLC („IBLLC“). Customer securities accounts at IBLLC are protected by the Securities Investor Protection Corporation (“SIPC”) for a maximum coverage of $500,000 (with a cash sublimit of $250,000) and under IBLLC’s excess SIPC policy with certain underwriters at Lloyd’s of London for up to an additional $30 million (with a cash sublimit of $900,000) subject to an aggregate limit of $150 million. Futures, and options on futures are not covered. As with all securities firms, this coverage provides protection against failure of a broker-dealer, not against loss of market value of securities.
For more information about SIPC and answers to frequently asked questions (such as how SIPC works, what is protected, how to file a claim, etc.), please refer to the SIPC and FINRA websites.
Shall you possess any further question, please use our FAQ (link below) or contact us if you cannot find the information you are looking for: https://www.interactivebrokers.com/en/index.php?f=46352
Kind regards,
David D
IBKR Client Services
Thanks for sharing Funky! The important part is “Aggregated fractional shares will become full shares.” This means at worst we have less than a share in danger and the rest will be back to full shares.
Hi Baptiste!
This is very useful! This isn’t available for CHSPI on IB right? I tend to have a significant amount left over each month since I don’t think you can buy fractional shares.
Charles
Hi Charles,
Correct, for Swiss shares, you would have to use Yuh (or FlowBank).