Have you ever wanted to invest a certain dollar amount, but the price of shares you want to buy prevents you from investing the entire amount? Do you find it's easier to think in round dollars rather than share prices?
If so, you may find fractional shares—also known as dollar-based investing—helpful for your strategy. This new trading feature lets you buy the stock of companies or ETFs based on a dollar amount, as opposed to how many whole shares you are able to buy for the amount you want to invest. Essentially, this allows you to buy a fraction of a share.
Here's what you need to know about fractional shares or dollar-based orders.
Fractional shares explained
Here's how fractional shares or dollar-based orders work. Assume you have a diversified portfolio (or you are trying to diversify an existing portfolio), and you have $20,000 that you would like to invest. After doing your research, you find a stock or ETF that trades for $130 you would like to purchase. Previously, you would be able to buy 153 whole shares ($130 x 153 = $19,890) with this amount of investment money. With fractional shares or dollar-based orders, if you wanted to invest the entire $20,000, a broker that enables fractional shares would allow you to purchase 153.8 shares (assuming no trading or transaction costs).
A related benefit is that this feature makes the trading process easier. When executing a trade, you don't need to do the calculation necessary to determine how many shares you can purchase with the money that you have after factoring in the share price and any trading costs. Instead, you can base your trade decision on how much you'd like to invest.
Of course, all the risks associated with investing in whole shares of stocks and ETFs exist for fractional shares or dollar-based orders. The primary risk is your investment can go to zero. Additionally, each stock has its own unique risks, and investors should seek to build a diversified portfolio and try to avoid having a mix of individual investments that would constitute an undiversified portfolio.
What you need to know
With fractional shares or dollar-based orders, you can trade National Market System (NMS) exchange-listed stocks. This includes stocks listed on the NYSE or Nasdaq. Stocks and ETFs available for fractional shares or dollar-based orders can change at any time, and you will receive an error message if an investment you are trying to trade is not eligible.
You can place market or limit orders, good for the day of the trade only. Fractional shares or dollar-based orders are eligible for real-time execution during market hours (approximately 9:30 a.m. to 4:00 p.m. ET) on normal trading days, and they may only be placed while the market is open. Fractional share quantities can be entered out to 3 decimal places (.001 as long as the value of the order is at least $1.00). Executions will be rounded down to the nearest .001 shares. Fractional shares or dollar-based orders can be entered out to 2 decimal places (e.g., $250.00), and your order will be converted into shares out to 3 decimal places (.001) and are rounded down to the nearest decimal. Investors utilizing fractional shares or dollar-based orders experience bid-ask spreads proportionally equivalent to the spreads for whole shares.
It's also important to know that the value of a trade may be impacted when entering a dollar-based buy or sell order. As orders are converted to shares, there is some rounding off of shares, so the value of shares you receive might be higher or lower than the dollar amount you requested. Also, sell orders are subject to additional assessments, and sell orders placed in certain account types, or account conditions, may be subject to taxes, which could reduce the proceeds of the order.
If you currently participate in Fidelity's Dividend Reinvestment Program, after you’ve placed your first fractional shares or dollar-based order, any fractional shares in your account acquired prior to that point in time will no longer be automatically liquidated when you sell.
You will not be able to participate in proxy voting or participate in most voluntary corporate actions for the fractional share portion of a position. You can't transfer or receive certificates for fractional share positions outside of Fidelity. Fractional share positions will need to be liquidated prior to transferring out. Review the Fidelity® Account Customer Agreement for further details.
Are dollar-based orders right for you?
Due to the unique risks of owning individual stocks, it is critically important to consider building a diversified portfolio of investments that align with your objectives and risk tolerance. When the time comes to make a new investment or manage an existing position, if you want to make trades on your terms, you may want to consider fractional shares or dollar-based orders.