Investing in Fractional Shares in Canada: What You Need to Know

The annualized average return of the S&P 500 index is around 10%. Some stocks that make up the S&P 500 are worth hundreds or thousands of dollars, which means they may be out of reach for the average online investor, bringing the need for fractional shares into focus.

In recent years, bull runs have built on the back of disruptive tech stocks such as Amazon, Netflix, Shopify, Alphabet, and many others. These big-ticket stocks are also priced at a premium. For example, shares of Amazon have risen to thousands of dollars before the company decided to split the stock in 2022. One of the world’s most expensive stocks in terms of share price is Berkshire Hathaway that’s trading at hundreds of thousands. So, how do you own these companies especially if you have a small amount of capital? Enter fractional shares.

Fractional shares will help you diversify your portfolio

Right now, the most popular equity instruments are trading at a premium and at sky-high valuations. You need to diversify your investment portfolio and buy fundamentally strong companies across multiple sectors, which means you will require significant capital to begin your investment journey.

For example, if you only have $1,000 to invest each month, your total annual savings allocated towards equity investments is $12,000. Now, if you want to have exposure to high-growth stocks that are worth say $500 per share, your $12,000 will purchase just 24 shares. While many of these stocks are quality companies that have generated massive returns for investors, it does not make sense to put all your eggs in one (or two) basket. But with the introduction of fractional shares, you can now get exposure to higher-priced stocks and own a piece of this rapidly expanding pie.

When you buy a company’s share, you earn a fractional part of that company. So, if a publicly listed company has 1 million shares outstanding and you buy 100 shares, you own 0.01% of the firm. Now, fractional shares are a part of the company stock and they help to diversify your portfolio thereby lowering overall risk.

Basically, if you have $12,000 to invest each year, you can identify a portfolio of stocks and allocate a certain amount in each one and buy a fraction of a share. Instead of owning one share of Nvidia, for example, you can buy 10% of it for less than a $100, then move on to buy shares of many other companies to keep your portfolio diversified.

Further, in case you follow the dollar-cost averaging method of investing, it’s quite likely that you will benefit from market corrections, allowing investors to buy the dip.

Wealthsimple is the first Canadian broker to offer fractional shares

The opportunity to buy fractional shares is a common feature for retail investors in the United States. Discount broker Robinhood introduced fractional shares in 2019 and rolled out the feature last year. Similarly, micro-investing company Stash has allowed users to purchase fractional shares since 2019 which has helped these platforms gain traction among a new base of investors.

But Canadians do not have access to the above-mentioned discount brokerages. So how do you buy fractional shares of companies while sitting in Toronto or Vancouver?

Wealthsimple was the first Canadian broker to offer investors the ability to buy fractional shares of U.S. and Canadian companies for as low as a single dollar. You can now buy fractional shares of most major Canadian and U.S. stocks including Tesla, Shopify, Coinbase, etc. Since then, other brokers such as Interactive Brokers have decided to offer fractional shares in Canada.

How can you buy fractional shares on Wealthsimple Trade?

After logging into your Wealthsimple Trade account, you can select the stock you want to buy and enter the number of shares with decimals, such as 2.5 for two and a half shares. While selling fractional shares, you also need to enter the number of shares you want to sell which can be 0.5 or 11.5 or any other fractional amount. Wealthsimple will provide you with an estimate of your total returns.

The bottom line

Investing in fractional shares is a solid way to allocate funds if you have a limited amount of capital. It allows you to have a stake in a company that would be difficult if you can’t afford to buy a whole share.

However, similar to any other investment, you need to ensure your holdings are well diversified which will allow you to create a robust portfolio and get good returns over time.

FAQs about fractional shares