The market has come a long way over the last couple decades. At one point, stocks were reserved for those with large amounts of capital, primarily due to the fact that it often took $50 or more to settle a trade. Starting with a $1000 would see you eat up more than 5% of your total cash balance just on commission.
You also had to buy entire shares. This would make companies like Amazon, Netflix, Shopify, and Alphabet (Google) inaccessible to the retail investor with a smaller 4 or 5 figure account.
It has been welcome changes for those learning how to buy stocks. Much like they adapted with commission pricing, brokerages continued to reduce the barriers to entry in the stock market.
How did they do it?
Brokerages changed the investment scene with fractional shares
Fractional shares have been around since the late 1990's. However, the idea wasn't made mainstream until much later. In fact, even 5 years ago you'd find it difficult to be able to find information on partial shares.
With the retail investment scene exploding, many brokerages have aggressively moved to make fractional shares not only a feature offered, but the centrepiece of their platforms. This is especially apparent in brokerages that cater to the millennial crowd, such as Robinhood and SoFi.
How do fractional shares work?
You might wonder how a brokerage can offer you the ability to buy 1%,10%, or 50% of a particular stock. How do they "split" the share. It is as simple as some back-end bookkeeping and share purchases by your brokerage themselves.
Your brokerage will acquire a whole share of the company. They will then split that share up and divide it amongst retailer investors that want a piece of that share.
It's important to keep in mind to that fractional ownership doesn't necessarily mean only stocks. In fact, there is even some platforms and artists right now that are buying and selling NFTs on a fractional basis.
The benefits of fractional shares in Canada
Fractional shares help you diversify your portfolio
The main benefit of fractional shares in Canada is the fact you don't have to buy a full share of a stock with an expensive share price. If an investor with a $10,000 portfolio wants to diversify into some higher-priced options, they aren't forced to buy a whole share, and can instead purchase a fractional amount to keep their allocations in line.
For example, if a Canadian with $10,000 to invest wanted to own Shopify, a single share would push them to a 17% allocation due to its high share price, which is not optimal for any equity portfolio. Now, you can simply buy a fraction of that share, keeping your portfolio well diversified and in check.
Fractional shares help with dollar-cost averaging
One of the most popular investment strategies today is dollar-cost averaging. It is the act of purchasing a set amount of a particular company at pre-determined intervals.
In the past, an investor would have to accumulate enough capital to be able to make purchases, and they would often be left with difficult decisions as to what stocks they should buy at the current time. If you manage to save $500 a month, it is likely you'd wait for 3-4 months before accumulating enough capital to deploy into your set of stocks you'd like to buy at the time.
With fractional shares, however, especially at commission-free trading platforms, you could deploy that $500 across your whole portfolio without having to gather enough money to make it worthwhile.
Fractional shares allow for better dividend reinvestment
Many investors have heard of DRIPing dividends. This is the act of telling your brokerage you'd like to take the dividends you receive and buy more shares.
However, traditionally there has been an issue with this. For example, if you owned Toronto Dominion Bank (TSE:TD) stock and wanted to DRIP your dividends, if you didn't have enough to buy a full share, you often would simply get the cash deposited instead.
Now, with fractional share ownership, it makes reinvesting dividends into Canadian companies a breeze.
The downsides of fractional shares
There are two sides to every coin, and many Canadians wonder what the catch is with fractional share ownership.
In reality, from a retail investor's standpoint, we can't really think of a downside to fractional shares. One could argue that fractional ownership breeds more reckless investing and less conviction, as there is likely more of a thought process that goes into buying a $3000 Amazon stock over a $30 portion of it.
However, this is probably overstated and over-exaggerated. The true downside of fractional shares would primarily come on the brokerages side, as it is much more of a process to operate this way. However, if they wish to appeal to more retail investors going forward, it is simply an added feature they'll need to deal with.
What if my fractional share pays dividends?
With fractional share trading, you simply own the portion of the dividend respective to your share ownership.
For example, if you own a $10 portion of a $100 share and it pays a $1 dividend, you will be entitled to $0.10 (or 10%) of that dividend.
Where can I buy fractional shares in Canada?
In Canada, the adoption of fractional shares has been much slower than that of the United States. As a result, if you're looking to buy a portion of a share, you'll have to head to Wealthsimple and open up a Wealthsimple Trade account.
The Wealthsimple Trade app even allows you to purchase fractional shares on the go, and commission-free.
It is the perfect brokerage platform for beginning investors. So, if you're looking to get started today, just click here to sign up.
What fractional shares can I currently buy in Canada?
At first it would have been relatively easy to list all of the fractional shares available among Canadian stocks. However, now this is simply not the case. Wealthsimple has been adding so many new companies, to list them all here would make this article a mile long. Instead, we'll just list some of the most popular ones available today, and link to the total list from Wealthsimple.
Popular Canadian stocks for fractional trading:
- Royal Bank of Canada (TSE:RY)
- Shopify (TSE:SHOP)
- CP Rail (TSE:CP)
- Granite REIT (TSE:GRT.UN)
- Lightspeed Commerce (TSE:LSPD)
- Suncor Energy (TSE:SU)
- WSP Global (TSE:WSP)
- Waste Connections (TSE:WCN)
Overall though? There are more than 60+ companies available at the time of writing for Canadian stocks. Lets move on to the United States...
Popular American stocks for fractional trading:
- Facebook/Meta (FB)
- Apple (AAPL)
- Tesla (TSLA)
- Amazon (AMZN)
- Abbvie Inc (ABBV)
- Berkshire Hathaway (TSE:BRK.B)
- Nvidia (NVDA)
- Coinbase (COIN)
- Paypal Holdings (PYPL)
- Microsoft (MSFT)
- Airbnb (ABNB)
Overall, there are hundreds of US stocks and ETFs available for fractional ownership on Wealthsimple. For both Canadian and US stocks available, you can read the entire list here.
Overall, fractional ownership is going to change the investing scene yet again
Although in terms of a broker here in Canada you are limited to Wealthsimple, we believe it is a matter of when, not if, major brokerages start to adapt to fractional shares.
There are no fees to participate, and investors with smaller accounts can now benefit from the capital gains and dividends of some of the strongest companies in the world.
Again, if you'd like to join Wealthsimple Trade and get started with fractional shares today, just click here to sign up!