Introducing The ABCs Of Fractional Trading

The trading world can be daunting, especially to the untrained eye.

Sometimes, trading can feel like navigating through an endless maze of charts, lines, flashing lights, and cryptic red/green candles. It’s like stepping into Sephora and feeling overwhelmed by the array of creams.

Looking at the US market, every stock seems like a steep investment, making it challenging to join the action when prices are low, despite seeing green mountains on charts spanning months or years.

Given the hefty price tags on stocks, particularly in the US, jumping into trading blindly isn’t advisable. No one wants to empty their pockets just to test the waters. After all, the aim of investing is to generate profits.

But what if there was a more affordable option that allowed investors to own small portions of high-priced stocks?

What are fractional shares

It’s a trading service that select brokers offer which lowers the barrier of entry substantially, ideal for investors who want to invest but don’t have that Tiffany spoon in their mouths.

With fractional trading, you can trade US shares in fractions from as small as 0.01 units. This means that you can buy stocks at just 1% of their share price.

For example, if Tesla is currently trading at USD174.95, with fractional trading, you can own Tesla from a minimum of USD1.75. Pretty amazing, right?

Fractional trading makes blue chip stocks affordable

Not yet sold? Say you have RM1,000 (roughly USD 208) to spend, here’s what you could trade:

Source: Rakuten Trade

Dubbed the ‘Magnificent 7’, these companies have been pivotal in bringing the US market to its current heights and for some, have become considerably pricier in the process. Are they on your radar?

Not keen on trading so many different stocks? How about just one that encapsulates all the above? Vanguard S&P 500 ETF (NYSE: VOO). It tracks the performance of the S&P 500 Index, offering exposure to big-name companies across various sectors, including the ‘Magnificent 7’ stocks plus Berkshire Hathaway (BRK-B).

Source: Rakuten Trade

Benefits of fractional share trading with Rakuten Trade

Note: Do exercise caution, as some brokers who offer fractional share trading have a minimum trading value quantity that must be met. At Rakuten Trade however, no such restrictions apply.

But like all good things, there are some downsides to trading in fractions (as you may have seen in Ziet Invest’s video)

Drawbacks of fractional trading

1) Higher total brokerage fees in the longer run. Instead of paying brokerage (RM2.34*) for 1 whole VOO share, you’ll pay RM12* brokerage from buying 0.1 units x 10 (equivalent to a whole share).
2) Less dividends as payout will be in proportion to fractional units.
3) Potential limitations on tradeable stocks. At Rakuten Trade, the stocks must have a current share price of more than USD1.

Why buy fractional shares

On the flip side, trading the US markets in fractional units means:
1) Increased accessibility into a market that normally one could not afford.
2) Reaping the rewards of investing in a fast-moving market now instead of later.
3) Testing out trading strategies with less risk.
4) More flexibility to diversify your portfolio with a limited budget.

At Rakuten Trade, fractional share trading is not just a hit with newbies but even seasoned traders are jumping on board. Almost 50% of all Rakuten Trade’s foreign market traders have dipped their toes into fractional shares, trading the same hot and trending brands that savvy traders love like ‘Magnificent 7’ stocks and VOO ETF.

Trading fees at Rakuten Trade are based on your total trading value with brokerage fees starting at RM1. They do not charge platform or settlement fees which new digital brokers have begun to introduce.

Fractional share trading is definitely a game-changer for beginners and novice investors itching to get jump into NYSE/NASDAQ, one fraction at a time.

*excludes brokerage and other regulatory fees
**Stock price taken at closing on 20 May 2024.
***1 USD = RM4.80
**** T&C Apply