The S&P 500 index has gained close to 40% in cumulative returns since the start of 2020. Several indexes are trading near record highs which means the stock prices have enjoyed an astonishing rally. The upward surge in several stocks may have pushed them out of reach for the average retail investor, bringing the need for fractional shares into focus. 

The ongoing bull run is built on the back of disruptive tech stocks such as Amazon, Netflix, Shopify, Alphabet, and many others.These big-ticket stocks are also priced at a premium. For example, shares of Amazon have risen from US$55 in January 2009 to US$3,573 today. Canada’s largest company in terms of market is Shopify and its stock was priced at $17 during its IPO. Shopify stock is currently trading at $1,819. One of the world’s most expensive stocks in terms of share price is Berkshire Hathaway that’s trading at US$417,600.

Despite market-thumping returns in the past, blue-chip tech stocks have enough fuel left in the tank to keep generating outsized gains in 2021 and beyond. So, how do you own these high-flying tech heavyweights especially if you have a small amount of capital? Enter fractional shares.

Fractional shares will help you diversify your portfolio

Right now, the most popular equity instruments are trading at a premium and at sky-high valuations. You need to diversify your investment portfolio and buy fundamentally strong companies across multiple sectors, which means you will require significant capital to begin your investment journey.

For example, if you only have $1,000 to invest each month, your total annual savings allocated towards equity investments is $12,000. Now, if you want to have exposure to high-growth tech stocks such as Shopify, your $12,000 will purchase just six shares. While Shopify is a quality company that has generated massive returns for investors, it does not make sense to put all your eggs in one basket. But with the introduction of fractional shares, you can now get exposure to higher-priced stocks and own a piece of this rapidly expanding pie.

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When you buy a company’s share, you earn a fractional part of that company. So, if a publicly listed company has 1 million shares outstanding and you buy 100 shares, you own 0.01% of the firm. Now, fractional shares are a part of the company stock and they help to diversify your portfolio thereby lowering overall risk.

Basically, if you have $12,000 to invest each year, you can identify a portfolio of stocks and allocate a certain amount in each one and buy a fraction of a share. Instead of owning one share of Amazon stock by investing US$3,573, you can buy 20% of the stock for just US$714.6. Without the introduction of fractional shares, you would have had to wait for several months to buy a single share of Amazon and your cash would be lying idle in your savings account.

Further, in case you follow the dollar-cost averaging method of investing, it's quite likely that you will benefit from market corrections, allowing investors to buy the dip.

Wealthsimple is the first Canadian broker to offer fractional shares

The opportunity to buy fractional shares is a common feature for retail investors in the United States. Discount broker Robinhood introduced fractional shares in 2019 and rolled out the feature last year. Similarly, micro-investing company Stash has allowed users to purchase fractional shares since 2019 which has helped these platforms gain traction among a new base of investors. 

But Canadians do not have access to the above-mentioned discount brokerages. So how do you buy fractional shares of companies while sitting in Toronto or Vancouver?

Earlier this month, Wealthsimple announced it is the first Canadian broker to offer investors the ability to buy fractional shares of U.S. and Canadian companies for as low as a single dollar. You can now buy fractional shares of four Canadian stocks and 10 U.S. stocks that include:

  • Shopify
  • Royal Bank of Canada
  • Toronto Dominion Bank
  • Canadian National Railway
  • Amazon
  • Alphabet
  • Apple
  • Microsoft
  • Facebook
  • Netflix
  • Tesla
  • Airbnb
  • Coinbase

Wealthsimple explains it has introduced this product due to Canadians’ demand for the option to buy fractional shares as a method to diversify portfolios and generate stable returns over time. The company also said this solution, “fits with our mission to democratize the levers of wealth creation…… our founding principle is that powerful financial tools should be available to everyone, no matter where you come from or how much you have.”

How can you buy fractional shares on Wealthsimple Trade?

After logging into your Wealthsimple Trade account, you need to search for Fractional Trading. You can select the stock from the above list and enter the dollar amount you aim to invest. Here, Wealthsimple Trade will let you know the estimated amount of shares you will be able to purchase.

While selling fractional shares, you need to enter the number of shares you want to sell which can be 0.5 or 11.5 or any other fractional amount. Wealthsimple will provide you with an estimate of your total returns.

Can you transfer fractional shares to other brokerages?

Wealthsimple Trade confirmed that fractional shares held in your account will not be transferred to another brokerage platform if you decide to switch brokerages.

Do you really own fractional shares in your account?

When you buy a fractional share, you own a fraction of the total shares outstanding. The other portion of fractional shares may be owned by other Wealthsimple clients. Your fractional shares will be added to your portfolio which means you will be the sole owner. Each time you buy a fractional share, a portion will be added to your pie until you have a full share.

Can you vote at the general assembly if you only own a fraction of the share?

According to Wealthsimple, if you don’t own a full share of a company, you will not be eligible to take part in any general assembly voting.

What about dividends?

Dividend stocks are often an investor favourite as it provides you an opportunity by creating wealth via dividend payouts as well as capital gains. A portfolio of blue-chip dividend-paying stocks will also help you create a passive income stream and benefit from compounded gains over the long term.

With Wealthsimple Trade, you are eligible for dividends even if you own a part of a share. For example, Apple pays investors a quarterly dividend of $0.22 per share and if you own 0.5 shares of the tech giant, you are eligible for a quarterly payout of $0.11 per share.

Can you transfer fractional shares to other brokerages?

Wealthsimple Trade confirmed that fractional shares held in your account will not be transferred to another brokerage platform if you decide to switch brokerages.

The bottom line

Investing in fractional shares is a solid way to allocate funds if you have a limited amount of capital. It allows you to have a stake in a company that would be difficult if you can’t afford to buy a whole share.

However, similar to any other investment, you need to ensure your holdings are well diversified which will allow investors to create a robust portfolio and beat the broader market over time.

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