Many people would say the smallest number ofsharesthat an investor can purchase is one,but the real answer is not as straightforward.
The answer to this question is complicated further by something known asfractional shares. A fractional share is a share of equity that is less than one full share and usually is the result of astock split,dividend reinvestment plan(DRIP), or similar corporate action.
Dividend Reinvestment Plan and Fractional Shares
A dividend reinvestment plan is a plan in which adividend-offering corporation or brokerage firm allows investors to use dividendpayoutsto purchase more of the same shares. As this amount "drips" back into the purchase of more shares, it is not limited to whole shares.
Key Takeaways
- The traditional minimum number of shares an investor can purchase from the open market is one.
- However, when using dividend reinvestment plans, roboadvisors, and fractional shares, an investor has access to percentages of whole shares.
- Brokerages and investment firms will often fractionalize shares to investors who are not able to purchase large shares like Berkshire Hathaway or Amazon, which often equal thousands of dollars a share.
In essence, you are not restricted to buying a minimum of one share, and the corporation or brokerage keeps accurate records of ownership percentages. For example, if you were enrolled into the DRIP of Cory's Tequila Corporation (CTC) and you owned one share of CTC—which pays a dividend of $2 per share and is trading at $40—the $2 dividend would be automatically used to purchase 0.05 ($2/$40) shares of CTC.
The reasonDRIPsare so popular is that most of them don't have commissions or brokerage fees, so it is cheaper for investors to increase theirholdingsand use their dividend payouts without having to pay extra fees.
Fractional shares are also being utilized by investment companies and apps such as Betterment, Stash, and Stockpile. By allowing people to trade fractional shares, such companies provide investors, many of them beginners, with access to stocks they may otherwise not have been able to afford to trade. Due to the growing popularity of such investment platforms with both individual investors and roboadvisors, fractional shares will continue to grow in popularity.
Utilizing Good Trading Practices Despite Share Size
While there is no minimum order limit on the purchase of a publicly-traded company's stock, it's advisable to buy blocks of stock with a minimum value of $500 to $1,000. This is because no matter what online or offline service an investor uses to purchase stock, there arebrokerage feesandcommissionson the trade.
When purchasing stock in the open market, an investor should open a trading or brokerage account with a leading financial institution such aseTrade, Charles Schwab, orAmeritrade.
Once the investor opens a trading account, it's up to them how many stocks they want to purchase at any one time.
Before making any purchase decisions, an investor should do ample research on the various types of equity securities that are offered. Once an investor identifies a stock worth purchasing, they should execute an online trade by using their brokerage account. There are two types of trades that can be made in this scenario: market orderanda limit order.
If the investor makes a market order, they choose to purchase the stock at the current market price. If the investor makes a limit order, they choose to wait to purchase the stock until the price falls to a specific limit. While purchasing a single share isn't advisable, if an investor would like to purchase one share, they should try to place a limit order so they have a greater chance of capital gains that offset the brokerage fees.
