Fractional Shares are a new investment option recently popularized by apps such as Robinhood, which made this market because no-fee trades make trading Fractional Shares economical.
For those who want to buy into stocks such as Amazon (AMZN), currently trading at over $3K per share, this can seem like a godsend for those who are feeling left out from huge runups in some of these tech giants. But, is that a good idea?
Does it break the Golden Goose Guide #1 rule of ownership? As you know, I recommend holding low-cost index mutual funds, not ETFs, because ETFs track the index instead of owning it. ETFs break the ownership rule.
However, Fractional Shares are not a synthetic instrument that tracks the index, they are just being divided up in your broker's accounting system. Therefore, your broker is holding real assets and this does not break the ownership rule.
That doesn't mean that Fractional Shares aren't entirely risk-free (nothing is). While whole shares are held in your name as the full owner, Fractional Shares are held in a pool of client assets at your broker. That sounds very much like Mutual Funds (which I do recommend), but while Mutual Funds are highly regulated to protect investors, your broker has to carry additional accounting and execution risk for Fractional Shares, so picking a proven broker is even more crucial.
Some downsides to Fractional Shares are that they are non-transferable to another broker, you don't get a vote as a shareholder (i.e., no ticket to Buffet's convention), and it encourages day trading in risky stocks instead of long-term investments in value-creating companies, which is the goal of Financial Freedom by Building Ownership (the Golden Goose Guide motto). Also, trading individual stocks carries extra risk and tax complications that index investing does not.
The bottom line? Invest if you want a way to get started on building ownership, but remember the goal!