What Are the Key Factors to Consider When Comparing Fractional Trading Options?

As the investment landscape evolves, younger investors are increasingly drawn to the stock market, where popular shares often come with hefty price tags exceeding $1,000 per share. To cater to the changing preferences of these new investors, fractional trading options have gained significant popularity. Fractional shares allow investors to buy and own a portion of an equity stock that is less than one full share. In this article, we will explore the key factors to consider when comparing fractional trading options offered by various online brokers and platforms.

The Rise of Fractional Shares

Fractional shares are not entirely new; they have sporadically appeared in the investment landscape over the years, but only recently have they become more readily available to the general public. Earlier, investors found themselves with fractional shares in their portfolios primarily due to dividend reinvestment, stock splits, or mergers and acquisitions. However, the ability to actively purchase fractional shares was limited until major online brokers introduced more accessible fractional share trading options.

Interactive Brokers initiated the trend in November 2019, followed by other industry giants like Fidelity, Charles Schwab, and Robinhood. Additionally, many robo-advisors now feature fractional share trading to help clients maximize their investments. The availability of these options has opened doors for retail investors to participate in the market, even when dealing with high-priced shares.

Key Factors for Comparing Fractional Trading Options

When considering fractional trading options, several factors come into play, which can significantly influence the choice of the brokerage or platform. These factors include:

1. Minimum Purchase Requirements: Online brokers offering fractional shares may have varying minimum purchase requirements. These requirements can vary from platform to platform, with some allowing purchases for as low as $1 or even less. Investors should consider their budget and how much they want to allocate to fractional shares when comparing different options.

2. Range of Available Stocks: Another essential factor is the universe of available stocks. Not all fractional trading platforms offer access to the same range of stocks. Some may focus on specific segments, like the S&P 500, while others provide a broader selection of stocks, including penny stocks. Investors should align their investment objectives with the platform's available stocks.

3. Real-Time Trading: Fractional shares can be traded in real time or at set intervals during the day. Some platforms allow investors to trade fractional shares at market close, while others offer more flexibility for real-time trading. Consider your trading style and whether real-time trading aligns with your strategy.

4. Commissions and Fees: With the shift to zero-commission trading, many fractional share platforms offer affordable trading options. However, it's crucial to understand any fees associated with fractional share trading, especially when placing orders for specific dollar amounts or quantities of shares.

5. Accessibility for Younger Investors: Fractional share trading options have attracted a younger demographic of investors. If you fall into this category, you might want to explore platforms that cater to your age group's needs and preferences. For instance, Fidelity reports that nearly half of its fractional trading clients are between 18-35 years old.

6. Transferability of Fractional Shares: When evaluating fractional share options, it's essential to consider the transferability of these assets if you decide to move your brokerage account to another firm. Fractional shares may need to be liquidated during the transfer, potentially incurring capital gains taxes.

7. Flexibility and Order Types: Some fractional share platforms offer more flexibility in terms of order types, allowing market orders or limit orders. Evaluate the order types offered by each platform to ensure they align with your trading strategy.

8. Hedging and Advanced Strategies: Fractional shares may not be suitable for certain advanced trading strategies, like writing covered calls or hedging. If you plan to employ these strategies, it's essential to understand the limitations of fractional shares.

Comparing Leading Fractional Share Platforms

Several reputable brokerage firms and platforms offer fractional share trading options, each with its unique features:

• Charles Schwab "Stock Slices": Schwab's program allows clients to purchase S&P 500 stocks for a minimum of $5 per stock, with the ability to hold fractional shares of all 500 S&P stocks. However, it has a limited universe of available stocks.

• Fidelity "Stocks By The Slice": Fidelity offers a flexible fractional trading program, allowing customers to buy a certain dollar amount or fraction of a share of most exchange-listed stocks. They also offer a wide range of account types.

• Interactive Brokers: Interactive Brokers provides a comprehensive fractional trading option, offering access to all U.S.-listed stocks with various order types. They even support the short-selling of fractional shares for customers with margin accounts.

• M1 Finance: M1 Finance's fractional share buying is integrated into its investment product, offering a wide range of NYSE, NASDAQ, and BATS traded stocks and ETFs. It is known for its robust aggregation of client trades and flexibility in executing them.

• Robinhood: Robinhood allows fractional share trading for stocks and ETFs worth over $1.00 per share with a market capitalization over $25,000,000.

As fractional share trading gains momentum in the investment world, investors have more options than ever to explore this strategy. To make informed decisions, it's essential to consider factors like minimum purchase requirements, available stocks, real-time trading, commissions, accessibility for younger investors, transferability of fractional shares, flexibility, and order types when comparing fractional trading options.

Each fractional trading platform has its unique offerings, and the choice ultimately depends on your investment goals, trading preferences, and risk tolerance. Whether you are a young investor looking to start small or a seasoned trader seeking a flexible approach, fractional shares can provide an accessible way to participate in the stock market and diversify your portfolio.

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