Is Investing in Fractional Shares with SoFi Invest a Good Idea?
Historically, the concept of fractional shares has been around for quite some time. These shares are part of a full equity package that is sold to investors who cannot afford the full price of an individual share.
In the first quarter of 2021, major corporations such as Amazon are valued at nearly $3,000 per share. As fractional shares allow investors with lower budgets to own a small portion of Amazon, they are a good option for those looking to diversify their investments.
Through robo-advisors such as SoFi Invest, you can own fractional shares of a company through your account there. Is this, however, a good idea?
For more information, please see our SoFi Invest review, and continue reading to learn more about investing in fractional shares in general.
Where Does the Money for Fractional Shares Come From?
The stock market does not allow for the purchase and sale of fractional shares in their own right. They do not exist in the traditional sense on the markets. Instead, they are brought about by a variety of other factors, including:
DRIPs are Dividend Reinvestment Plans that allow you to reinvest your dividends (DRIP).
Stock splits are taking place.
Acquisitions and mergers are two terms that come to mind.
Despite the fact that you cannot purchase a fractional share on the open market, these types of shares must exist due to the laws of mathematics.
Suppose a stock split is carried out at a 3:2 ratio, which means that for every pair of shares an investor owns, three new shares are created for him or her. If you owned three shares of a company’s stock at the time of the split, your holding would increase to 4.5 shares.
The majority of modern investment platforms serve as places where both saving and investing can be done automatically. The platform will automate the process of purchasing more and more fractional shares until you have created a full share once you have made your deposit.
This scenario provides investors with a choice, and fractional shares have the potential to maximise every dollar invested.
What is the procedure for purchasing fractional shares?
The only way to acquire fractional shares is through a brokerage firm. The best robo-advisors are all able to provide fractional shares in some capacity.
Platforms such as M1 Finance and Stash are well-known for offering investors the opportunity to acquire fractional shares. Investment platforms purchase whole stocks and then distribute them to individual investors. In order for a brokerage to purchase fractional shares, they must go through a third party.
It should be noted that fractional shares are not as desirable as whole shares. In many cases, investors do not want to hold fractional shares, especially if they acquired them as a result of a stock split.
It all depends on how much demand there is. A hot company will always have a market for fractional shares, regardless of how hot the company is. Most brokerages, on the other hand, strive to combine fractional shares into a single full share.
Is It Beneficial to Purchase Fractional Shares Through SoFi Invest?
SoFi Invest, through its SoFi Stock Bits programme, makes it possible to purchase fractional shares of a company’s stock. You can purchase a fraction of a share of stock for as little as $5. Stock Bits has practically every major company represented, including Alphabet, Amazon, Facebook, and Nike, to name a few examples.
As previously stated, the primary advantage of fractional shares is that they prevent money from simply sitting in your account doing nothing. Any investing guide will tell you to put your money to work and make the most of every dollar you have.
SoFi ensures that every dollar is put towards your favourite individual stock or exchange-traded fund (ETF).
Another reason to purchase fractional shares is to increase the amount of passive income generated by stocks that pay high dividends over time.
Many investors prefer to purchase monthly dividend stocks because they provide them with a consistent stream of income. This is popular among investors who want to reinvest their dividends to buy more stock, as well as people who are retired and want to live off their dividend income streams.
Finally, fractional shares are a simple and effective way to diversify your portfolio when you have a limited investment budget. It can be difficult to come up with the funds necessary to gain exposure to a large segment of the market when starting out.
Fractional shares allow you to use your spare change to easily build your investment portfolio by allowing you to use your spare change to invest. A viable strategy for early-stage investors is to purchase fractional shares of a company’s stock at a discount.
What about the Fees and Charges?
If you purchase stock through a traditional brokerage, you will be charged a commission on the transaction. In addition, you’ll be required to pay a management fee at the end of the fiscal year simply for the privilege of having that firm hold your assets on your behalf.
Fractional shares can be risky because you are purchasing a smaller amount of stock with the same fees attached. It is not recommended to spend money on fractional shares when dealing with a number of brokerages.
In contrast, SoFi Invest, as well as many other robo-advisors, do not charge any fees to execute a trade, nor do they charge monthly or annual management fees for their services. This allows you to make a profit on fractional shares without having your profits reduced by high transaction fees and commissions.
This is one of the reasons why these platforms are becoming increasingly popular. They’re making it easier for everyone to access the market.
Fractional shares are not something that every investor is interested in. However, they can be beneficial to investors who are just getting started and have limited resources. The ultimate goal should be to convert them into full shares over time, but in the meantime, you can still add value to your portfolio by making intelligent use of them.
When you invest with SoFi, you pay no fees and no commissions on any trades you make. In order to plan your financial future for the least amount of money possible, this is the platform for you.