How to Invest Without a Big Bankroll

There is an old riddle that asks, “how do you eat an elephant?” The answer is, “one bit at a time

The idea is that large tasks or great things can be accomplished if taken in small steps

You may feel that building wealth in the stock market is out of reach because so many stocks are priced so high. It is not unusual to find stocks that cost hundreds or even thousands of dollars a share.

However, did you know that you can own a piece of a share for a fraction of the share price?

The concept is called “fractional investing”. While you can invest in a variety of nontraditional products, we’re going to stay on the main road and focus how you can use fractional investing in the stock market

This post explores what fractional investing is, how it works, and why it's a powerful tool for building your portfolio.

What is Fractional Investing?

Fractional investing allows you to buy a portion, or fraction, of a single share of stock or Exchange Traded Fund (ETF). Traditionally, you could only purchase whole shares, meaning if a company's stock price was $1,000 per share, you needed to have $1,000 to invest.

With fractional shares, you can invest any dollar amount you choose, even if it's less than the price of a full share. For example, you could buy $50 worth of that $1,000 stock, owning 1/20th of a share.

How Does it Work?

Brokerage platforms that offer fractional investing handle the back-end complexities. They pool together fractional shares from multiple investors to create whole shares.

When you buy a fractional share, you own a proportional interest in that whole share. If the stock price goes up or down, the value of your fractional share changes proportionally.

Investing in Fractional Shares of EFTs

Fractional investing isn't limited to individual stocks. It also extends to ETFs (see ETFs: A Power Investment Tool in the Resource Directory), allowing investors to own portions of a diversified portfolio of assets.

This is particularly beneficial for accessing ETFs with high per-share prices, making them more attainable for smaller investors. By purchasing fractions of ETF shares, you can dollar-cost averaging into a diversified portfolio becomes easier, as you can invest small amounts consistently. More on that in another article.

Benefits of Fractional Investing:

• Accessibility: Fractional investing breaks down the barrier of high share prices, allowing you to invest in individual companies and ETFs, regardless of their cost per share. This opens up a world of investment opportunities that were previously out of reach for many.

• Diversification: Even with a small budget, fractional shares enable you to diversify your portfolio across multiple companies. However, ETFs accomplish the same thing, because, like a mutual fund, they invest in multiple stocks. Diversification is a key strategy for managing risk, as it spreads your investments across different assets.

• Flexibility: You can invest specific dollar amounts, rather than being limited by the price of a full share. This gives you greater control over your investment strategy and allows you to invest consistently, even with small amounts of money.

• Learning and Experimentation: Fractional investing provides a great opportunity for beginners to learn about the stock market without risking large sums of money. You can experiment with different investment strategies and gain valuable experience.

Example:

Let's say you want to invest in a company or EFT that is trading at $500 per share. With fractional investing, you could invest just $50 and own 1/10th of a share. If the price rises to $600, your investment will increase in value proportionally, to $60.

Who is Fractional Investing For?

Fractional investing is beneficial for a wide range of investors, including:

• Beginners: It's an excellent way to start investing with limited capital and learn the ropes of the stock market.

• Small Investors: Fractional shares allow small investors to diversify their portfolios and participate in the growth of expensive companies.

• Long-Term Investors: Consistent investing in fractional shares can be a powerful strategy for building wealth over the long term.

Important Considerations:

• Brokerage Fees: While many brokerages offer commission-free trading, it's essential to check for any hidden fees or charges associated with fractional share transactions.

• Dividend Reinvestment: Ensure your brokerage platform allows for dividend reinvestment with fractional shares. Reinvesting dividends can significantly boost your returns over time.

Conclusion:

Fractional investing has democratized access to the stock market, empowering individuals to start investing with small amounts of money and build diversified portfolios. It's a game-changer for beginners, small investors, and anyone looking to grow their wealth over the long term. By understanding the benefits and considerations of fractional investing, you can leverage this powerful tool to achieve your financial goals.