Back in June, I mentioned that we switched from TD Direct Investing and Questrade to Wealthsimple to take advantage of the transfer bonus promotion. I also noted that we wanted to take advantage of Wealthsimple’s ability to support fractional DRIPs and fractional purchases.
Many readers were intrigued about our switch and contacted me for additional questions. Interestingly, some of them asked how fractional shares work. To be more specific, are fractional shares advantageous for DIY investors?
Let’s dive into this question, shall we?
Fractional shares are partial shares of a company’s stock that are less than one whole share. So instead of buying one whole share, you are buying 0.25, 0.50, or some fractional numbers of the stock.
Usually fractional shares allow you to buy a stock based on a specific dollar amount. For example, if a stock trades at $200 and you only have $50 to invest, you can purchase 0.25 shares of the stock. In other words, you don’t need to have $200 before you can invest a full share in the said stock.
Interestingly, you can also specify how many shares you want to purchase and the broker would calculate how much it’d cost. For example, you can specify that you want to purchase 10.25 shares and if the stock trades at $40 per share then it’d cost you $410 (note, the final actual price may change due to fractional share purchases are market orders).
Historically, when you purchase a stock or an ETF via a broker, you must buy a whole share.
This is slightly different if you were to purchase stocks through a transfer agent like Computershare by setting up a Direct Stock Purchase Plan (DSPP) but the process can be a bit complicated and time consuming.
Years ago, outside of transfer agents, the only other broker from whom you could buy fractional shares here in Canada was ShareOwner. ShareOwner ceased to exist after Wealthsimple purchased them in 2020.
Although fractional share purchases are readily available in the US through many different discount brokers, currently only three discount brokers in Canada allow you to buy and sell fractional shares – Wealthsimple Trade, Interactive Brokers, and TD.
Wealthsimple Trade supports fractional share trading for over 500 stocks and ETFs. The fractional trading feature is enabled by default. All you need to do is enter the dollar amount you want to invest in the app and Wealthsimple will estimate the quantity of shares you’ll get. Once the trade is completed, you’ll get a notification about the actual amount of shares you purchased. You can also state how many shares (and fractional shares) you want to purchase.
For Interactive Brokers, you need to go into your account settings and make sure you subscribe to fractional shares. IB offers tractional share trading on eligible US, Canadian and European stocks and ETFs.
TD recently announced support for fractional purchases and allowed investors to sign up for 40 free fractional trades. This is a right step in the direction but once you use up your free trades, at $9.99 per day, the high commission rate may defeat the key benefit of fractional shares.
In case you’re thinking of opening an account with Wealhsimple or transferring your existing account over to Wealthsimple, you can use my referral code. You’ll get a $25 reward for simply signing up.
Yes, I believe fractional shares are very advantageous for investors and there are three key benefits of fractional shares:
- Allow investments in high-priced stocks
- Start investing with less money
- Allow for better diversification
- Allow for greater compounding
The key reason for utilizing fractional shares is to allow investors to buy stocks that they wouldn’t otherwise afford. For example, Costco trades at around $850 per share. If you want to invest in one Costco share, you’d need at least $850. If you wanted to own more than one share, you’d need multiples of $850. If you wanted to own 20 shares, the dollar amount quickly adds up (i.e. $17,000).
With fractional shares, you can specify a dollar amount that you want to invest in. For example, if you only have $100 available, you can buy 0.1176 Costco shares. If you happen to have $1,500 available to invest, you can get 1.7647 Costco shares.
Essentially fractional shares allow you to buy high-priced stocks more easily. Rather than having to own full shares, you can own a small, even a tiny, part of these companies. More importantly, fractional shares allow you to own different stocks and ETFs without having to spend a lot of money.
Being able to own different stocks and ETFs without having to invest a lot of money is great, because this allows you to invest money across different stocks and allows you to build a more diversified portfolio.
Many years ago when I first started DYI investing, I bought 100 shares of ING (now called Intact Financial) which cost me under $5,000.
Back then other than these 100 shares of ING, I didn’t own any other stocks. So from a risk and exposure point of view, I was extremely vulnerable and not diversified at all. If fractional shares had have been available then (and commission-free trading), it would have been better to pick 10-20 stocks and/or ETFs and split the $5,000 equally across these stocks/ETFs.
For me, I think the ability to buy fractional shares is a big game changer for DIY investors. Why? Because it allows everyone, regardless of how much money you have available for investing, to start an investment portfolio and create a better financial future.
Although there are many benefits of fractional shares, it is always important to examine the potential downsides of fractional shares.
- Lack of voting rights – when you own fractional shares, you don’t get any voting rights. In other words, you won’t be able to vote in important company decisions. Having said that, if you own 2.432 shares of the company stock, you do still get 2 votes. You just don’t get a vote for the fractional shares. Furthermore, some people don’t care whether they vote at these company annual meetings or not so perhaps this is a minor point.
- Open market trades only – fractional shares can only be purchased and sold on the open market. In other words, you can’t buy fractional shares and set limit buy prices. Due to open market trades only, if the share price is moving up and down quite a bit, you may be surprised by the final settled stock price.
- Transfer to other brokers can be problematic – since not all brokers in Canada support fractional shares, if you were to transfer your shares from Wealthsimple Trade or Interactive Brokers to another broker, you will need to sell the fractional shares first.
Despite these three downsides, I think the benefits do outweigh the downsides when it comes to fractional shares.
Would you receive dividends when you own fractional shares?
Yes, dividends will still work with fractional shares. Dividends will simply get paid out per the number of shares you own, whole and fractional.
For example, if you own 0.5 Costco shares and Costco payout is $1.16 per share, then you will receive $0.58 in dividends. Vice versa, if you own 10.124 Costco shares, you will receive $11.74 in dividends (the amount is rounded to the hundredth).
What happens when a stock splits, what happens to your fractional shares? Essentially you’d get the equivalent shares post split. For example, if you own 0.231 shares of Nvidia before the 10-for-1 stock split, after the split, you’d own 2.31 shares of Nvidia. It’s pretty simple and straightforward.
When it comes to dividend reinvestment plans (i.e. DRIP) and fractional shares, everything still works the same concept as full shares. Whatever dividends you receive will get reinvested in fractional shares.
For example, if you own 0.5 Costco shares, you’d get $0.58 in dividends. That money is reinvested to purchase more Costco shares. If Costco shares are at $850 per share, you’d end up with 0.006 Costco shares (fractional shares are down to the thousandth digit).
I think where fractional shares really shine is when you have recurring investments set up. If you automatically invest $100 per week to purchase XAW, you don’t have to worry whether you have enough money to buy a full share. Regardless of how much the XAW share price is, your $100 will get invested every week and allow you to take advantage of compound interest.
In summary, I truly believe fractional shares are very advantageous for investors, especially for new investors who may not have a lot of starting capital.
For me, after transferring my TFSA and RRSP to Wealthsimple and setting up a non-registered account, I really enjoy the ability to buy fractional shares. Fractional shares have reduced the amount of brain power required for investing new capital regularly. I believe any simplicity in investment is always welcomed.
How would you rate Wealthsimple’s desktop App? I’m not a fan of the idea of using a phone for trading. Thank you.
Desktop app works fine but some settings like fractional drip isn’t available to turn on via desktop app. I find that once I set up my account the way I wanted, then trading on the desktop app is totally fine.
I started with WS Trade exclusively in 2020 as I dipped my toe in self-directed investing. Through time, I witnessed WS Trade getting better and better.
It does take them a long time to implement some of our wishes (coming soon spousal RRSPs) and still do not have some things like self-directed RESPs. But they are definitely improving.
I have kept my eye on what others say about other brokerages (Banks, Qtrade, Quest trade, IBKR, etc.) and nothing mentioned has ever convinced me to switch over either because it does not apply to me yet (Norbert’s Gambit) or because it is not worth me giving up on the commission free trades (buy & sell).
Their CAD-US exchange fee is probably more expensive than others (1.5%) but as a premium client with over $100K invested, I get US accounts for free and just pay the exchange fee (recently started US funds in RRSP).
We get what we pay for (in this case, since we pay nothing, we get more than we pay for). Some suspect they take a penny here and there on trades. Maybe, no one knows for sure, but these penny’s never add up to trading fees others charge. I do question how they make money as well. I suspect they may be losing money and worry sometimes all this good will come to an end. Until then, if it ever happens, I am growing my portfolio.
Thanks for sharing with us your experience with WS Trade. 🙂
Your reason for transfering from Questrade to Wealthsimple is the reason I did this move back in January. That and the lack of innovation from Questrade. I feel Wealthsimple has come a long way from it’s beginning, meanwhile Questrade hasn’t seemed to adapted at all with the sign of times. For example, if you sell an ETF, you still get fees on Questrade opposed to WS. The only reason for anyone to keep Questrade is if you either trade on Margin account or if you want to use the Norbert’s Gambit because you happen to invest heavily in US listed ETF’s/companies.
Questrade was a game changer a decade ago when there wasn’t a competitor like Wealthsimple. They were a breath of fresh air in a time when you either invested through expensive mutual funds or expensive brokers….but I feel they just stopped innovating after the entrance of Wealthsimple.
Questrade still offers some benefits over WS, like research and Norbert’s Gambit. But I agree with you, Questrade needs to come out with new features to attract new clients and keep existing clients.
WS is more like a no frill discount broker. Is it perfect, no there are limits but you know what you’re getting. 🙂
Thanks for your note on fractional shares. I use Qtrade which does not offer them. It does offer drip shares and about 100 ETFs which trade at zero Commission. How does Wealth Simple make money if they do not charge Commissions on trades?
I think they make money via managed accounts and also the other add-ons like US accounts.
TD Direct investing has just started fractional purchases. They are offering to waive fees for investors to encourage us to experiment with them.
Yes! And offering a few free fractional trades for their anniversary
Right, good point! No fractional drip yet with TD though.
Note: I have update the article to mention that TD supports fractional shares too.