|How Fractional Shares Can Make You Rich
Charles B. Carlson, CFA
Contributing Editor, Dow Theory Forecasts
One of the things mutual funds - as well as BUYandHOLD -- got right is understanding that investors prefer to think in dollar terms, not share terms. Being able to invest in dollar terms means that you can invest all of your budgeted money each month to buy full and fractional shares. This is a huge plus for investors.
For example, let's say your monthly budget allows you to invest $200 every month in a stock. And you really like a stock that trades for $55 per share. Your $200 buys approximately 3.635 shares. Now, if you invest via BUYandHOLD, your $200 investment will buy both full and fractional shares. If you invest via a broker that does not allow you to buy fractional shares, however, you won't be able to put all of your $200 to work. In other words, roughly $35 (equal to the value of the fractional share) of your $200 monthly investment will go uninvested.
If you can't buy fractional shares, chances are you'll end up spending the money that would buy a fractional share, thus missing out on the potential return of that fractional share.
Do you know what $35 per month, earning 11% per year, grows to over 15 years? Almost $16,000, or roughly 290 shares of that $55 stock.
Another reason being able to buy fractional shares is useful is that it allows you to buy any stock, regardless of price. This is significant. Too often, investors with a little money feel compelled to buy low-priced stocks. Unfortunately, many low-priced stocks lack the quality, seasoning, and long-term potential of larger, higher-priced blue chip stocks. The upshot is that many investors buy lousy stocks merely because that's all they can afford to buy.
The ability to buy fractional shares means that it doesn't matter if a stock is $10 or $100 since you can buy fractional shares. This opens the door for an investor to buy virtually any stock, regardless of price. Thus, instead of settling for cheap stocks with weak prospects, small investors can buy blue chips. In short, the ability to buy fractional shares reshapes the buying decision and skews it toward the purchase of higher-quality stocks, which is a good thing.
When considering investment strategies, don't underestimate the ability to buy fractional shares. Indeed, those fractional shares can add to thousands of dollars over time.
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