This Brokerage Account Feature Is an Absolute Must

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There’s one feature everyone should look for in a brokerage account. Read on to see what it is. 

There was a time when paying a commission every time you bought or sold a stock was common. But these days, most brokerage accounts offer commission-free trading, which can save investors a bundle.

In fact, you may be hard-pressed to find a brokerage account that still charges those fees. But it’s still important to choose your investment account wisely.

For example, you may want a brokerage that doesn’t impose an account minimum so you don’t have to worry about a lower balance. And you probably don’t want a brokerage account that charges inactivity fees, because there may be times when you go months without making any trades.

But when looking for a brokerage account, it’s important to prioritize one that offers the option to invest on a fractional basis. Doing so could be your ticket to building a diversified portfolio, even if you don’t have a ton of money to work with.

The importance of fractional shares

The concept of fractional shares is simple. Instead of having to buy a whole share of stock, you can buy a piece of a share if a whole share is out of reach financially, or if you don’t want to tie up so much money in a single share.

For example, let’s say you have $400 to invest, and you’re interested in owning a piece of a company whose share price is $400. That means that your portfolio will be invested in a single stock, and that’s not a good thing.

With fractional shares, you’d be able to buy, say, $40 worth of that company, or one-tenth of a share. That way, you could put your remaining $360 into a bunch of different companies.

The reason fractional shares are so important is that they make it easier to build a diversified portfolio when you don’t have a lot of money on hand. And a diversified portfolio could be your ticket to not only growing wealth over time but also avoiding losses during periods of market turbulence.

Let’s say you have a $400 portfolio that consists of two stocks only. If the value of those stocks declines substantially, your balance could shrink to $300 overnight. If those stocks are only two of 10 or more that you own, your portfolio balance might only drop to $350 or $360.

How many different stocks should you own?

There’s no hard and fast rule when it comes to the number of different stocks you should put into your portfolio. The Motley Fool recommends a portfolio of 25 stocks or more, so you can use that as a starting point.

In general, it’s a good idea to own, say, 30 to 40 stocks, because that’s a reasonable number to keep tabs on. You probably don’t want to own 130 to 140 stocks because that’s just too many individual companies to track.

But remember, when we talk about owning stocks, you don’t necessarily need to own whole shares. As long as your brokerage account offers fractional shares, you can invest in a healthy number of companies, even if you only have a few thousand dollars — or even just a few hundred — to work with.

You also don’t have to start out owning 25 stocks or more from day one. You can start with five or six stocks and build up over time. The point, however, is that fractional investing could make it easier to diversify, so it’s best to find a brokerage account that offers that option.

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