Robinhood’s Fractional Shares, Explained

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The industry was abuzz in December 2019 when mobile-based trading platform Robinhood announced it would be offering fractional share purchases to investors. While Robinhood is not the first to offer the ability to buy stocks for less than the sticker price, it is arguably one of the most well-known and recognized platforms to get into the game. Investors looking to diversify and invest by purchasing stocks with high absolute share prices will now be able to thanks to Robinhood.

In this article

    What is a fractional share?

    By definition, a fractional share is a position in a stock that is less than the entire share value. Instead of owning one whole share of stock, an investor might be able to own 1.5 shares or even something like 0.25 shares of stock. Fractional shares allow investors to purchase stocks in less-than-whole increments, which gives them the ability to purchase stocks they might not have otherwise been able to afford if they were forced to purchase an entire share.

    “Fractional shares offer opportunities to smaller investors to be able to participate in some of the biggest companies in the capital market that otherwise they couldn’t own in their portfolios,” says Brennan Drew, managing director at WestPac Wealth Partners. “However, it’s important to consider fees associated with the trades. A flat fee can eat into a significant portion of smaller portfolios.”

    Robinhood’s fractional shares explained

    Imagine you went to a pie store that only let you buy a whole pie. What happens if you want a slice of delicious apple pie and don’t want to have to pay for the whole thing? Well, thankfully, most pie stores believe in fractional pie sales. This analogy is exactly how Robinhood fractional shares program will work. If you can’t afford or don’t want to buy an entire share of stock, you can now buy a smaller portion.

    Remember, some stocks like Alphabet — which owns Google — and Tesla are well over $500 a share. If you’ve got limited investing funds or are just starting out, you might not want to put the bulk of your funds into one stock.

    Let’s take the analogy one step further to show why this works so well with Robinhood’s platform. Imagine you went to the pie store and the store is willing to cut the pie for you so you could buy a single slice. Everything is great until you find out the store charges a $5 fee for boxing up every pie. You find out that even though you’re only getting one slice, the fee is still the same.

    If you’re purchasing a whole pie, you’re fine with this because it’s a smaller portion of the purchase price. However, paying the boxing fee for just one slice of pie is enough to make you not want to purchase. This is much like a trading fee when you purchase stocks. Before platforms like Robinhood, investors had to buy shares in large blocks, or else the trading fee would eat up any potential profits.

    Robinhood is famous for offering fee-free trades, though. This means purchasing just a few dollars’ worth of stock can now be a part of a fiscally smart investment plan since each trade costs $0 in fees. Imagine trying to buy $1 worth of stock and being charged $7 to execute the trade. Any hopes of a profit would be dashed.

    Currently, Robinhood has not announced the exact date it will be opening up fractional shares to its clients. The December announcement on the company’s blog was light on details about how the program will operate. The company does state that investments as small as $1 will be accepted and that major companies like Amazon, Apple, Disney and Berkshire Hathaway (which costs over $115,000 for one share) would be among the thousands of covered stocks.

    The company did offer a few additional details when you dig further into the platform. ETFs and stocks will both be covered, but not all ETFs and stocks. Fractional stocks will be able to be purchased based on dollar amounts or on share amounts. In other words, you can say you want to purchase “$10 worth of Amazon,” or that you want to purchase “0.6 shares of Amazon.” The smallest purchases you can make are $1 for the buy-in-dollars option or 0.000001 for the buy-by-shares option.

    Regarding supported stocks, the company states that stocks worth over $1.00 per share and with a market cap of at least $25M will be supported. If this expands, the company says it will notify customers.

    Voting rights for stocks will be aggregated and submitted based on percentage ownership. Dividends will be paid out in the same manner. Stock transfers are not allowed for fractional shares. If you move to transfer your account and positions out of Robinhood, the fractional shares will be sold and converted to cash.

    Other fractional shares

    As mentioned, Robinhood is not the first to offer fractional share purchases to investors. Companies like M1 Finance, Motif, Stash and Stockpile also offer fractional shares. While some of these options could be great choices, Robinhood will quickly rise to the upper echelons of the list once it launches its own fractional shares trading. Fee-free trading and the trust that comes with a platform used by over 10 million traders can’t be ignored.

    As Robinhood is one of the first major players to enter fractional share trading, it won’t be the last. Investing giant Charles Schwab announced in a recent Wall Street Journal interview that the platform would be releasing the option later this year to try and woo younger investors to the table.

    Methodology

    SimpleScore

    The SimpleScore is a proprietary scoring metric we use to objectively compare products and services at The Simple Dollar.

    For every review, our editorial team:

    • Identifies five measurable aspects to compare across each brand
    • Determines the rating criteria for each aspect score
    • Averages the five aspect scores to produce a single SimpleScore

    Here’s a breakdown of the five aspect scores and their rating criteria for our review of the best stock trading platforms and brokerages of 2020.

     

    Why do some brands have different SimpleScores on different pages?

    To ensure the SimpleScore is as helpful and accurate as possible, we developed unique criteria for every category we compare at The Simple Dollar. Since most brands offer a variety of financial solutions, their products and services will score differently depending on what we’re scoring on a given page.

    However, it’s also possible for brands to have multiple SimpleScores, as we measure each category individually with a separate set of criteria. For example, when we apply our methodology to Chase’s stock trading product, it scores a 3.6 out of 5. On the other hand, when we compare Chase checking accounts, it scores a 4.4 out of 5.

    Questions about our methodology?

    Email Hayley Armstrong at hayley@thesimpledollar.com.

    Mobile app rating

    We took an average of each stock brokerage’s iOS App Store and Google Play ratings and scored brands based on the result.

    Additional products

    Investing is not just about stocks. We rated brands based on their product variety including ETFs, bonds, mutual funds, IRAs and options. The more products means higher the score.

    Resources

    We rated brands based on how many educational and investing resources are available. This includes Morningstar reports, market trends, how-to guides and more.

    Customer support

    When you run into trouble with your stock investment account, how can you get in touch for support? We award brands with more channels of support with higher scores in this aspect.

    Customer satisfaction

    We leveraged J.D. Power’s 2020 U.S. Self-Directed Investor Satisfaction Study to rate each brand’s customer satisfaction. As always, a higher customer satisfaction rating means a higher SimpleScore.

    Jason Lee

    Contributing Writer

    Jason Lee is a U.S.-based freelance writer with a passion for writing about dating, banking, tech, personal growth, food and personal finance. As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skill sets with the rest of the world. Follow Jason on Facebook here