Fractional shares are changing the Canadian investing game

By
8 Minutes Read

Everything you need to know about these Slices of stock.

 

What's a fractional share?

A fractional share is a (less expensive) portion of a full share. For example, if it costs $100 to buy one share in Company A, then it would cost $50 to buy 50% of that share.

The magic of fractional investing!

 

 

How are fractional shares created?

Typically, the trading platform you're using – not the company you're investing in – will divide stocks into fractional shares.

However, sometimes a company ends up creating fractional shares when they split a stock.

Stock splits are an action companies take to create more stocks without affecting that company's market capitalization (a stat that tells you the value of all the stocks in a company added together). Instead of issuing additional stocks, a company will simply split up the stocks they have.

For example, if you buy a share for $100 and the company announces a 2-1 split (two shares for every one share), you'll end up with two shares worth $50.

The basic idea behind stock splits is to bring down stock prices and attract new investors.

Now, 2-1 isn't the only kind of stock split – and depending on how a company splits their stock, they could end up creating a fractional share. For example, a company might announce a 3-2 split (three shares for every two). If you own one stock, you'll end up with one and a half (a.k.a. a fractional share).

 

Why should you care about fractional shares?

Because fractional shares cost less than full shares.

Let me put it this way: did you know that one Tesla share costs more than $1,000 USD? If your first thought is I can't afford that – same! Higher priced stocks make it difficult for the average person to start investing, especially in big companies.

I mean, can you imagine if you could only buy potato chips 100 bags at a time? Like, maybe you don't want $500 worth of potato chips right now...but a bag would be nice.

 

 

That's why fractional shares are so cool – they save you from paying a minimum of $1,000 to invest in the top companies on your list. Instead, you can choose to invest as little as $1, giving you more control over how you invest your money (and making it easier to invest in your favourite stocks).

We love anything that makes investing accessible for all Canadians. Let me count the ways fractional trading is about to make your life easier and your personal finance game stronger.

 

Diversification, baby!

 

Minimizing risk

Diversifying your portfolio means spreading your investments across different categories (like companies, sizes, and even industries) so if something goes wrong, it won't bring the whole empire toppling down.

Picture this: you're on vacation and heading out for dinner. Before you leave, you put your passport, your credit cards, your phone, and all of your cash into a purse and bring it with you. Now, how much would it suck to lose that purse?

It's probably a little less risky to keep a bit of cash back at the hotel (with your passport) or even in your jacket pocket. That way, if you do happen to leave your purse on the subway, you aren't completely – um – flocked.

 

 

Same logic applies to stocks...

If you put all of your money into automotive companies based in the midwest, those stocks will probably react similarly to changes in the market (the price of fuel, for example).

On the other hand, if you invest in a few automotive companies, a tech company and a big financial firm, you won't lose all your money if automobiles are suddenly outlawed. (Okay, that's a stretch, but you get the picture).

 

Where do fractional shares come in?

Fractional shares allow you to spread your money across different stocks for example, investing $1,000 into four companies instead of just one. Suddenly, you have the benefit of diversification and you can still afford groceries. Win-win.

 

You can also buy fractional shares in ETFs!

 

Speaking of a diversified portfolio...

Exchange-traded funds (ETFs) are kinda like stocks that are made up of other stocks. They trade on the stock market with their own ticker symbol, and they contain a group of stocks, bonds or commodities.

Think about the S&P 500 – an index that tells you how the top 500 companies in the U.S. are performing. You might want to invest in a bunch of those companies, but that would take a lot of time (and money, if you're paying broker fees).

Instead, you could invest in SPDR ETFs and buy multiple stocks listed in the S&P 500 for a bundle deal.

 

 

This is just one example of an ETF – there are a lot of options out there. And get this: since ETFs are available as fractional shares, you can incorporate this diversification tool into your investing strategy for as little as $1.

Is compounded diversification a term?

If not, I just coined it. ;)

 

Oh yeah, and you can still earn dividends

 

What are those?

Dividends are a payment made by a company to its shareholders just, you know, as a thank you. <3

But actually, a lot of companies pay out dividends (either as cash or additional stocks) because they want to share profits with stakeholders and make their company attractive to future investors.

It's often the big companies that pay out dividends – smaller, high-growth companies tend to invest profits back into the business.

Dividend payments are typically priced per share. Pretend you just bought five shares in Company A. If Company A pays $4 per share annually, and the payment schedule is quarterly, you'd make $20 a year. Quarterly, you'd receive dividends equal to $1 for every share you own.

Your payment schedule might look something like this:

January – $5

April – $5

August – $5

December – $5

 

 

How do dividend payments work for fractional shares?

Buying fractional shares of a dividend stock works the same as any other fractional investment. Just keep in mind that not every stock is guaranteed to be available as a fractional share.

The dividend payments you receive will still depend on the number of shares you own. So, if you buy a quarter of a share in Company A (remember them from a second ago?), you'll receive dividends worth $1 by the end of the year.

Let's break that down.

Company A pays $4 per share annually, or $1 per share quarterly. Your payment schedule could look something like this:

January – $0.25

April – $0.25

August – $0.25

December – $0.25

While payments might be small, depending on the size of your investment, the bottom line is that you can still receive dividends when you trade fractional shares (yay!).

 

Fractional shares are great for the DRIP

 

More bang for your buck (or something like that)

A dividend reinvestment plan (DRIP) takes the dividends you receive and automatically reinvests them in the stock market. DRIP is another way you might end up with slices of stock in your portfolio.

The thing is, you can also enjoy the benefits of a dividend reinvestment strategy without DRIP, if you buy fractional shares with your dividends manually.

Reinvesting your dividends (essentially free money) is a great way to maximize your investment gains. I mean, rather than keeping those dividends in your savings account, why not put them to work in your investment portfolio?

 

Fractional shares are less messy

Fractional shares make it waaay easier to tackle dividend reinvestment plans on your own.

Without fractional shares, you might not be able to reinvest your dividends in the stocks you prefer, depending on how prices fluctuate.

Or, maybe you have enough to buy some shares – but you don't have exact change. Guess you're pocketing that extra $1.20...

The beauty of fractional shares is that you can get the most out of every dollar. If you make $16 in dividends, you can easily invest that money in the company of your choice.

 

Fractional shares + dollar-cost averaging = a match made in heaven

 

Dollar-cost averaging explained...

This is another investment strategy that gets a whole lot easier with the help of fractional shares. The basic idea is that, instead of investing your money all at once, you invest that same amount of money in steady increments.

For example, you decide you want to invest $10,000 in a company's stock. If you choose a dollar-cost averaging route, you might invest $1,250 every quarter over two years.

Alternatively, you could also decide to purchase a specific amount of shares every time you invest, rather than invest a set amount of money.

 

Why would an investor choose dollar-cost averaging?

The thought process behind this strategy is that dollar-cost averaging can prevent emotion-driven investment decisions AND reduce risk.

Emotion in investing

Stock price fluctuations are scary. Even long-term investors who intend to wait out dips in the market can get nervous and sell stocks when prices drop, or might be tempted to buy at a high price because a stock seems valuable.

Neither of these moves are necessarily wrong – the problem is when decisions are made based on emotions, not data. Want to learn some other ways emotions interfere with your investing decisions? Check out our blog post on investing psychology!

If you've committed to investing $1,250 every quarter – despite market changes – you're likely to avoid making impulse decisions. So, dollar-cost averaging can actually be pretty useful to avoid emotion in investing.

 

Let's talk about risk

The rationale here is that, by spreading out your investment, you'll sometimes buy stock at a high price and sometimes at a low price.

On average, your investment will even out; you'll avoid the potentially big losses that result from investing a bunch of money right before a dip in the market. Of course, the flip side is that dollar-cost averaging might also neutralize big wins.

As always, it's up to you to decide how much risk you're comfortable taking on in exchange for potential gains.

 

Enter: fractional shares

If dollar-cost averaging is totally your jam, fractional shares make it way easier!

Thanks to fractional shares, you can invest the exact dollar amount you planned on. If you've budgeted for $1,250 a quarter, you're guaranteed to always find available shares (or fractions of shares) at that price.

And speaking of budgeting – like fractional trading, dollar-cost averaging makes investing achievable even if you don't have a ton of disposable income lying around.

 

You can hold fractional shares in a TFSA

 

Grow your fractional investments tax free

Since you can invest fractionally in all kinds of securities -- including dividend stocks and ETFs – a Tax-Free Savings Account (TFSA) is just as relevant when you trade fractional shares as it is for any investment.

Luckily, you won't run into any trouble here – you can absolutely hold fractional shares in a TFSA.

 

 

Benefits of a TFSA

We know…the name is misleading. A Tax-Free Savings Account is not just for savings – it actually allows you to grow investment income (like capital gains, interest, and dividends) without paying taxes on your earnings.

A TFSA is a personal finance staple, and also the type of account you'll fund on Flahmingo!

There are other important nuances – the annual contribution limit is a big one – which we cover in this blog post. Enjoy!

 

How can you buy fractional shares in Canada?

 

With the Canadian trading platform, Flahmingo (hi!)

Flahmingo is a commission-free fractional trading platform. We make it easy as Pies and Slices for anyone to buy fractional shares in Canada, whether they're new to investing or a seasoned pro.

 

 

Buying fractional shares

Wondering how exactly you can use Flahmingo to buy fractional shares in Canada? Here's a step-by-step guide:

Step One: Fund your Flahmingo account.

Step Two: Create a Pie (in other words, a portfolio). Your Pie can be named whatever you like – whether it's the goal you're investing toward (Vacation Pie) or the industry you're planning to invest in (Tech Pie).

Step Three: Choose your Slices (stocks or ETFs). You can add up to 100 Slices to your Pie!

Oh, and FYI – there are more than 2,200 securities to choose from on the Flahmingo app.

Step Four: Choose the dollar amount you'd like to invest in your Pie, and specify how you'd like that money split between Slices.

For example, maybe you invested $100 in your Pie, and you'd like that money divided evenly between five Slices. That would mean 20% of your total dollar amount is allocated per Slice.

Step Five: We'll invest your money based on the percentages you chose and confirmed.

Let's say you want to invest $500 in Company A, and that company's stock is trading at $30 each. You'd be able to buy 16.66 shares – and the best part is, you don't have to do that calculation yourself!

 

Summing it all up

 

Fractional shares cost less, making your investing goals more attainable

You can buy a fractional share for as little as $1 – so you don't have to save up for months to start investing.

The option to trade fractional shares also gives you more control over how and when you invest your money. Thanks to fractional shares, companies you'd love to invest in, but which might have share prices beyond your budget, are now an option. And if you'd prefer to buy your shares in increments over time – fractional shares make that easier too!

 

 

Fractional share trading helps you diversify your portfolio

Instead of investing all of your money into a single stock, fractional shares allow you to spread that same dollar amount over several stocks.

Why concentrate your investment on a single company, when you can minimize risk by taking a diversified approach?

 

You can buy fractional shares in dividend stocks and ETFs

You're still eligible for dividends when you hold fractional shares. Just remember that dividend payments are based on the number of shares you own (so if you own half a share, those payments might be smaller than what you're used to receiving on other investments).

ETFs have diversification built right in – which makes it even more convenient that you can buy them fractionally.

 

It's easy to trade fractional shares in Canada using Flahmingo

Build a Pie, choose your Slices and Flahmingo will invest your funds in the stocks you chose and the percentages you specified.

We're all about personal finance and fractional shares – because, at the end of the day, investing should be flock'n easy. 

Ferron Guerreiro

Author