Fidelity Investments is the latest brokerage to let investors trade fractions of stocks and exchange traded funds on its online brokerage platform for free.
In the past, investors needed at least the company's share price to buy in, leaving many unable to invest in pricey companies like Google's parent company Alphabet, which is currently over $1,400 per share. Fidelity now allows purchases of as little as .001 of one share, meaning if a stock's price is $10, the minimum investment needed is one penny.
"Customers can now own a piece of their favorite companies and ETFs based on how much they want to invest, independent of the share price," Scott Ignall, head of Fidelity's brokerage business, said in a release.
The feature is available in Fidelity brokerage accounts, HSAs, IRAs, and self-directed brokerage accounts via a workplace retirement plan, and the trades will happen in real time. Fidelity joins Robinhood SoFi, Stash and others in offering fractional investing to individual investors. Charles Schwab also announced last year that it would roll out the feature, though it has not yet.
Lowering the threshold for individuals to invest in companies can be a good thing. But experts say to be cautious, even if you're not investing a ton of money in partial shares. Here's why.
What to know about fractional shares
Investing in a company that seems to have unstoppable growth is an exciting prospect. Every investor wants to find their own stock market "unicorn."
But before attempting fractional investing, you need to make sure you have your financial basics covered, Greg McBride, chief financial analyst at Bankrate, tells CNBC Make It.
That means that you have some liquid savings, you've paid down any debt you may have accrued (or at least have a repayment plan in place) and you're investing a healthy portion of your paycheck for retirement, typically via an index fund that gives you exposure to an array of companies.
Buying individual stocks can be enticing, especially when you can buy into them for next-to-nothing, but you first should have exposure to all different sorts of companies and sectors. Put all of your eggs in one basket, and, well, you better hope nothing happens to that basket. CNBC's Jim Cramer recommends that the first $10,000 you invest go to a low-cost index fund or exchange-traded fund that mirrors the S&P 500.
"The individual investor is better suited by investing in mutual funds and exchange-traded funds," says Bankrate's McBride. "But the lure of individual stocks is always there. On some level, so is the belief that doing so enables the investor to beat the market, which has proven not to be true."
Buying fractional shares of ETFs, however can be a smart move — these typically have lower fees than mutual funds and can offer the same broad market exposure.
If you already have some savings stashed away and you're investing in index funds for retirement, then there's no problem with dipping your toe into fractional investing. Just be sure to thoroughly vet any company you're interested in and make sure it's just one piece of your overall financial plan.
Correction 2/3/2020: An earlier version misstated that Charles Schwab offers fractional trading. It has not yet launched the feature.
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