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It’s an option that’s probably available to you.
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Building a diversified portfolio is one of the most important steps you can take as an investor. If you load up on a wide range of companies and assets in your brokerage account, you can not only grow a lot of wealth over time, but also protect yourself in the face of stock market turbulence.
But what if you’re not exactly overflowing with available funds to invest? Between your rent or mortgage payments, car payments, utility bills, and food costs, you might run into a situation where you’re down to your last $5 from that month’s paycheck.
The good news, though, is that you can actually do a lot with $5. Just ask Vivian Tu of Your Rich BFF.
When $5 can really go far
In a recent video, Tu explained that buying broad market ETFs is a great way to branch out and build a solid portfolio. But broad market ETFs can trade for over $200 a share, which may be beyond your investing budget. That’s not a problem, however, thanks to fractional shares.
As Tu said, “We no longer live in the Dark Ages.” And while investors, in years past, were forced to buy shares of stocks or ETFs in whole increments, these days, that’s not a requirement. That’s because most major brokerages now let you invest in fractional shares.
Here’s how that might work. Let’s say there’s a stock or ETF you want to own that trades for $200 a share. If you only have $5 to put into an investment, a full share clearly won’t be feasible. But the good news is that you can buy just $5 worth of whatever company or fund you’re looking at.
Now, you may be aware that some companies pay dividends to shareholders. If you’re wondering how that works in the context of fractional investing, it’s simple. If you put $5 into a stock that trades for $200 a share, it means you own 1/40 of a share. If the company pays a quarterly dividend of $40, you’d get $1. Everything is simply proportional.
Similarly, let’s say you buy 1/40 of a share of stock whose value increases by $100. That means you’d be looking at a $2.50 gain if you were to sell your fractional share of that stock.
Money doesn’t have to be a barrier to diversification
It’s hard to load up on different stocks when you’re limited in the amount of money you have to invest with. The great thing about fractional shares is that you can buy bits and pieces of different stocks and ETFs so that all told, you’re assembling a diverse investment mix.
In fact, if you really want to branch out to cover the broad stock market, look at buying shares of total stock market or S&P 500 ETFs on a fractional basis, or in full if you can swing it. That gives your portfolio exposure to different companies and market sectors without having to burden yourself with researching dozens of businesses.
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