Fractional Shares: How to Buy Fractional Shares in Australia?

At the age of 11, Warren Buffett made his first stock purchase—three shares of Cities Service preferred stock at $38 per share—in the first quarter of 1942. In a 2018 interview, Buffett noted that had he put that $114 into the S&P 500 at the time, it would be worth about $400,000 today.

What can you learn from this legendary billionaire investor? For many, the key takeaway is the importance of leveraging compounding returns to start building wealth sooner rather than later.

Many beginner investors often encounter budget constraints when considering blue-chip stocks, which tend to be more expensive, trading for $200, $500 or more. However, fractional share trading opens up a world of investment opportunities, allowing you to start out small and make the most of your available funds, regardless of the unit price.

How to buy fractional shares, and what are the potential benefits and risks? Let's dive in.

What are fractional shares?

As the name suggests, fractional shares represent a portion of a whole share. Owning a fractional share means that you possess less than a whole share of a company.

Fractional share trading has become a popular investment trend in the US share market, significantly reducing the entry barrier for beginner investors. It empowers beginner investors with limited capital to invest in companies or ETFs for a specific dollar amount.

Apart from direct purchases, fractional shares can also be generated through the following means:

Reverse Stock Splits:

When a company conducts a reverse stock split, for example, in a 1-for-2 reverse split, every two shares held by an investor are consolidated into 1 share. If the original number of shares held is odd, fractional shares may result.

Dividend Reinvestment Plan (DRIP):

When using cash dividends to purchase stock, if the dividend amount is insufficient to buy a whole share, fractional shares are received.

Mergers and Acquisitions:

During stock-for-stock mergers, fractional shares might be created based on the exchange ratio.

Employee Stock Incentive Plans:

When exercising options, fractional shares may occur if they are converted based on market value.

This article primarily discusses the situation of direct purchases. If investors acquire fractional shares through the methods mentioned above, they can also refer to this for handling them.

How do fractional shares work？

Instead of buying a whole share, you can buy a fraction of a share.

For instance, if a single share of a company is priced at $1,000, fractional share trading enables you to invest in $100, or 0.1 of a share. If the company’s share price then rises by 10% to $1,100, your investment would also appreciate by 10%, increasing its value to $110.

Not all brokers offer fractional shares, but many modern online brokerage platforms do. Moomoo can handle the logistics of dividing shares and crediting them to investors' accounts, starting at just US$5.

When you purchase a fraction of a share, or receive fractional shares due to stock splits, you are treated the same as an investor who owns a full share. This means you enjoy the same percentage gains and ownership rights as full shareholders, including access to dividend income.

A practical guide to fractional share investing

Fractional share trading is vital in tackling two key challenges encountered by investors, especially newcomers who typically begin with limited capital. Firstly, it enables investors with limited funds to purchase any stock they desire. Secondly, it facilitates the allocation of smaller amounts across various companies, making portfolio diversification more accessible and straightforward.

Imagine you have $500 in your brokerage account and wish to evenly distribute it among the renowned Magnificent Seven Stocks—Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Alphabet (GOOGL), Amazon(AMZN), Meta (META), and Tesla (TSLA). On a particular day, the share prices for each company are as follows:

● $Apple (AAPL.US)$ : $235

● $Microsoft (MSFT.US)$ : $418

● $NVIDIA (NVDA.US)$ : $138

● $Alphabet-A (GOOGL.US)$ : $165

● $Amazon (AMZN.US)$ : $189

● $Meta Platforms (META.US)$ : $576

● $Tesla (TSLA.US)$ : $220

If fractional share investing is unavailable, you would be left with three potential investment options, none of which would fully optimise your available funds:

1. Acquire one share each of Nvidia, Alphabet, and Amazon; Total cost: $492; Remaining cash: $8.

2. Purchase one share of Apple and one share of Tesla; Total cost: $455; Remaining cash: $45.

3. Buy one share of Microsoft; Total cost: $418; Remaining cash: $82.

Conversely, if fractional share trading is available, you can divide your $500 into seven equal portions of $71.43 each and invest in the Magnificent Seven Stocks.

As a result, you would acquire 0.30 share of Apple, 0.17 share of Microsoft, 0.52 share of Nvidia, 0.43 share of Alphabet, 0.38 share of Amazon, 0.12 share of Meta, and 0.32 share of Tesla. This approach not only allows you to fully invest your entire capital but also ensures that you hold equal-sized positions in all seven companies.

Fractional share trading enhances the accessibility of dollar-cost averaging, a widely embraced investment strategy that entails consistently investing a fixed amount of money at regular intervals, irrespective of market fluctuations. This approach streamlines the investment process by shifting the focus from the number of shares to the dollar amounts being invested. Rather than calculating how many whole shares you can purchase, you can simply determine the amount of money you wish to allocate.

For instance, if you have $100 available each month to invest in an ETF priced at about $500 per unit, fractional share trading allows you to invest the entire $100 monthly instead of having to wait for several months to accumulate enough for one whole unit. This enables your money to start working for you immediately, allowing you to benefit from compounding on the full amount you choose to invest.

What assets can you trade in fractions?

Moomoo provides fractional share trading for hundreds of US stocks and ETFs, primarily focusing on blue-chip companies. To view the list of available fractional shares, simply go to Markets > US > Fractional Shares.

Images provided are not current, and this is for illustrative and information purposes only.

If a stock supports fractional trading, the Fractional Shares icon will be visible on the stock’s Detailed Quotes page.

Please be aware that the availability of fractional shares for trading may be updated at some point. The minimum order size for fractional trading is 0.0001 share, with a minimum purchase amount of US$5.00.

Additionally, there’s good news: the fees for fractional share trading can be lower than those for whole shares. On moomoo, for fractional share orders involving less than one whole share, the only charge is a brokerage fee of 0.99% of the transaction amount, with a maximum cap of US$0.99.

How to buy fractional shares in Australia?

Fractional share trading operates much like traditional share trading, but with the ability to buy and sell in smaller increments.

Want to get started? Moomoo's got you covered.

Step 1: Open a moomoo account. You can register with your email address or mobile number and submit the application form and other documents. Then you can take charge of your trading with moomoo.

Step 2: Trade fractional shares. You can navigate to the stock's Detailed Quotes page, then tap the Trade icon. You can choose to trade based on a specific quantity or dollar amount.

Simply tap the Double-headed Arrow to switch between these options, then enter the Quantity or Amount you wish to trade. Finally, tap the Buy icon to submit your buying order.

Images provided are not current, and this is for illustrative and information purposes only.

Potential benefits and risks of investing in fractional shares

Now you know how to trade fractional shares on moomoo, it's important to note that there are two sides to every coin. Here are some potential benefits and risks of fractional shares.

Potential benefits:

• Flexibility: Fractional share trading enables investors to participate in high-priced stocks with smaller amounts of capital, making it particularly appealing to those just starting out or with limited funds.

• Investors can invest a specific amount of money according to their budget and investment strategy, rather than being forced to trade in whole share increments.

• Diversification: By purchasing fractional shares of different companies, investors can achieve portfolio diversification without requiring a large amount of capital.

• This means even small investors can spread their funds across multiple industries and companies, reducing the impact of volatility in a single stock on their overall portfolio.

• Reinvestment: Fractional shares make it easier to reinvest dividends. Instead of waiting to accumulate enough dividends to purchase whole shares, investors can reinvest dividends immediately into fractional shares.

• Cost Efficiency: By allowing investments in smaller increments, fractional shares can help investors avoid leaving cash idle, optimizing the use of available capital.

Potential risks:

• Liquidity Risks: Trading fractional shares might be less straightforward than trading whole shares, especially if the stock isn't actively traded.

• Spread Loss: The difference between the buying and selling price (the bid-ask spread) is often larger, which might make it difficult to get the price you want.

• Voting Rights: Fractional shareholders may not have the same voting rights as full shareholders, since voting rights are typically granted per whole share.

• Limited Availability: Not all brokers offer fractional shares, and those that do might have limitations on which stocks can be purchased fractionally.

• Complexity: Managing a portfolio of fractional shares can be more complex, especially when it comes to tracking performance and calculating taxes.

The bottom line

Fractional share trading opens the door to high-priced stocks, significantly reducing the entry barrier for beginner investors looking to enter the market. It promotes regular investing, allowing investors to contribute smaller amounts consistently over time instead of waiting to accumulate sufficient funds for full shares.

With fractional share trading, you can achieve enhanced diversification in your portfolio by spreading investments across a variety of stocks. Moreover, it facilitates the implementation of a dollar-cost averaging strategy, enabling you to consistently invest fixed amounts in fractional shares. This approach can help reduce the effects of market volatility while steadily growing your wealth over time.