Robinhood Fractional Shares: Everything You Need to Know About Them
Robinhood Markets, Inc., founded in April 2013, is a FINRA-regulated online brokerage firm that enables its investors to trade stocks, options, exchange-traded funds, and cryptocurrency, without having to pay any commission. In December 2019, the internet was filled with lots of excitement when the online brokerage firm announced it would be allowing its investors to buy fractional shares.
Robinhood fractional shares are pieces or fractions of one full-share of an organization or exchange-traded fund (ETF), that you can trade on Robinhood platforms. Furthermore, this type of shares can be as small as 1/1000000 of a full share of a company, such as Google and Amazon.
There are lots of reasons why buying fractional shares might or might not be the best decision for you. In the rest of this article, we’ll be sharing with you everything that you need to know about Robinhood fractional shares. This will include a detailed explanation of what Robinhood fractional shares are all about, whether or not you can purchase the shares on the Robinhood markets app, and the benefits attached to buying them.
What Are Robinhood Fractional Shares?
Before going straight to explaining, in detail, what Robinhood fractional shares are, let’s first talk about “fractional shares” alone. By definition, fractional shares are pieces of an equity stock that is less than one full share of a company or exchange-traded fund.
Furthermore, apart from buying fraction shares from brokerages, there are several other ways in which fractional shares can be achieved. One of them is through stock splits – a situation, whereby an organization divides the existing shares of its stock into several new shares, in order to boost the stock’s liquidity. Other ways to achieve fractional shares include dividend reinvestment plans, stock splits, mergers, and acquisitions.
There are lots of benefits attached to buying fractional shares of a company. In the past, an investor had to own enough money to be able to buy one full share of a company. However, the introduction of fractional shares has made things quite easy. Now, without having to worry about the budget, investors can buy as small as 1/1000000 of a company’s share.
Here’s a better explanation of fractional shares; imagine Google has a stock that’s priced at $5,059.48 per share, and you only have $50 to spare for the share. You can always buy a portion of the share, which is equivalent to $50 – that’s about 1% of one full-share of Google’s stock.
Speaking of Robinhood fractional shares, it was first announced by the giant brokerage firm on December 12, 2019. Don’t get it all mixed up, a few brokerage firms have been offering fractional shares before Robinhood came into the scene.
The only difference, however, is that Robinhood offers zero-commission trading, eliminating the worries that trading fees would eat up any potential profits. That said, with Robinhood fractional shares, you can buy a portion of a share for as low as $1.
Can You Buy Fractional Shares On Robinhood?
According to Robinhood co-CEO Vlad Tenev, they rolled out the feature because it fits one of the company’s core values, which states that “participation is power”. That said, one of the benefits of Robinhood fractional shares is that it creates investment opportunities for people – especially those who aren’t able to participate in the stock market, because of their financial capabilities.
As for the burning question of whether or not you can buy fractional shares on Robinhood, the answer to the question is “Yes, you can”. As of December 2019, when the giant brokerage firm announced the fractional feature, over 200,000 accounts signed up for the offering, according to CNBC. Since you now know that you can buy fractional shares on Robinhood, here’s another question, how do you trade fractional shares on the platform?
It’s pretty simple, you’ll be able to trade fractional shares on Robinhood, by placing real-time fractional share orders in dollar amounts. According to Robinhood, you can buy as small as 1/1000000 of a company’s share but the purchase will be rounded to the nearest penny.
Furthermore, it’s worth noting that fractional share trading is currently available for good-for-day (GFD) market orders. However, extended hours aren’t supported for trading such shares.
Why Can’t You Buy Fractional Shares on Robinhood?
Let’s face it! You can always buy fractional shares on the Robinhood markets app. However, there are certain restrictions that the online brokerage firm has put in place. First, the minimum transaction for purchasing fractional shares on the Robinhood markets app is $1. Apart from that, this type of shares is only available as good-for-day (GFD) market orders. With that, it means that transactions won’t be completed if the market is closed.
Furthermore, it’s worth knowing that there are currently restrictions on some of the popular stocks, listed on the platform. Although you can buy fractional shares of popular stocks belonging to companies like Tesla, Amazon, Apple, Microsoft, and Netflix, Robinhood’s website recently revealed that trading restrictions were placed on GameStop and AMC’s stock.
That said, if you’re looking to buy fractional shares on Robinhood for popular stocks like GameStop, you might not be able to do that at the moment. That’s because the online brokerage firm has raised trading limits on the restricted stocks, and removed the option to buy fractional shares.
Are Fractional Shares Worth It on Robinhood?
There are lots of benefits attached to buying and trading fractional shares on the Robinhood markets app. Why we won’t be able to mention all of them in this post, let’s have a quick look at some of them below.
One of the reasons why trading fractional shares on Robinhood is worth it is that it enables young investors to start investing with very little money, eliminating entry barriers. Furthermore, since Robinhood utilizes a zero-commission, it means you can buy any company’s share irrespective of how pricey they are.
That’s not all! Buying fractional shares on Robinhood also means that you won’t have to worry that trading fees would eat up any of your potential profits. Another benefit attached to buying Robinhood fractional shares is because the feature makes it easier to invest precise dollar amounts in a company.
Is There a Downside to Fractional Shares?
There are always two sides to every investment; the advantage and the disadvantage. Above, we have been able to talk about the reasons why buying fractional shares on Robinhood worths it. It’s also worth noting that there are a few downsides to trading fractional shares, although they aren’t that serious.
That said, one of the drawbacks of investing in fractional shares is that it might wind up paying a lot of fees, especially when a brokerage firm charges commission and you’re interested in buying shares from multiple companies. Another downside to investing in fractional shares is that your broker might end up keeping your dividend.
How Long Do Robinhood Fractional Shares Last?
Are you wondering how long Robinhood fractional shares last? If yes, you might have to stop worrying too much about it. Let’s face it, Robinhood fractional shares can last for a very long period.
That said, when it comes to holding your Robinhood fractional shares for longer term, there are lots of benefits that you stand to gain. First, doing that helps you to override the possibility of negative returns. Apart from that, it also helps you to compound your returns, in case you invested in dividend-paying stocks.
What Happens to Fractional Shares in a Stock Split Robinhood?
As earlier mentioned, one way to come by fractional shares is through stock splits. In case you don’t know, a stock split occurs when a company decides to split one share of its stock into multiple shares. Apart from increasing the number of shares, there are no major benefits of stock splits. Instead, it causes a decrease in the market prices of individual shares.
To the burning question of what happens to Robinhood fractional shares in a stock split, it’s worth knowing that two things happen. First, a stock can experience a forward stock split. If this happens, you’ll be able to receive a relevant amount of your Robinhood fractional shares.
Furthermore, there’s also a reverse stock split, a situation whereby the number of shares owned by a company in the market decreases, increasing their market values. And in this case, you’ll be able to receive the cash equivalent of any fractional share amounts coming from the split.
Robinhood Fractional Shares Waitlist
A waitlist is a mode that occurs when a particular feature is oversubscribed. That said, in the case of Robinhood fractional shares, a waitlist mode happens when the campaign reaches its maximum goal. What that means is that the brokerage firm is no longer accepting investments.
Any fractional shares investment that comes after that period goes straight to the Robinhood fractional shares waitlist. Furthermore, space only opens up for investors from the waitlist, if any of the earlier investors decide to cancel or fail to fund their investment commitment, at the right time.
Three factors affect the order of fractional shares waitlist. They include the period, at which the investment commitment was made, the amount invested, and how active the investor is on the app.