fbpx
How To Invest

Buying stocks? How to use fractional shares to reduce your portfolio risk

Every investor knows about the key concept of diversification – to allocate your capital and investments across various assets to reduce your risk. It’s repeated ad nauseum, and through quotes since time immemorial.

‘Don’t put all your eggs in one basket.’

‘Don’t bet the farm.’

‘Never go all in.’

So on and so forth.

But in this day of YOLO bets, meme stocks, and a seemingly ever-rising stock market, I think it’s good to remind everyone of the risk of not diversifying your portfolio through a very simple example.

Let’s say you invested your entire portfolio of $100,000 in Palantir at the peak of its hype (#YOLO) in January 2021 at $35 a share. If you held onto Palantir till now (12 January 2022), the stock is now worth just $17 a share – a 50% plunge. And your previous six-figure portfolio is now only worth half what it once was. Ouch!

Risk on a single-stock portfolio.

On the other hand, if you had diversified your portfolio equally across 10 stocks, your stake in Palantir would only cause a 5% dent in your portfolio. Much easier to swallow. At the same time, your other investments could still do well and push your overall portfolio into the green.

Risk on a diversified portfolio.

In fact, you don’t need that many stocks to diversify your non-market risk. Research done by Edwin J. Elton and Martin J. Gruber has shown that having just 10 stocks in your portfolio can reduce your risk (variance) by 76% compared to a single-stock portfolio.

When stocks grow too big…

So we all know the benefits of diversification and the need to allocate your portfolio across 10 to 20 stocks to reduce non-market risk. However, a problem comes when a stock is too ‘big’ to fit into a single allocation within our portfolio.

For example, if you’re just starting out and you only have $10,000 to invest, then an investment in Amazon becomes tricky. That’s because a single share of Amazon is priced around $3,400. One share will already take up one-third of your entire portfolio, leaving you overexposed to Amazon if you initially planned on having 10 stocks equally weighted across your portfolio.

So how do you solve this problem?

With fractional shares.

How fractional shares work

‘How do you eat an elephant?’

‘One bite at a time.’

A fractional share is less than a full share of a company. So instead of buying one full share, you can purchase half a share, or any fraction for that matter.

For example, instead of buying one share of Amazon at $3,400, you can purchase 0.29 shares which works out to around $1,000 — which now fits perfectly with your portfolio allocation.

And it’s not just Amazon that has a high stock price; Alphabet ($2,900), Booking ($2,300), Shopify ($1,300), and Tesla ($1,200) are other stocks that you may find difficult to fit into your portfolio if not for fractional shares.

In a nutshell, the advantages of fractional shares are obvious, they:

  • Allow anyone to start investing with a small amount of money
  • Make it easier for anyone to invest in any stock regardless of its price
  • Allow you to invest precise amounts in a stock, down to the decimal point
  • Allow you to finetune your portfolio allocation and diversify your risk accordingly

Fractional shares are particularly popular among younger and newbie investors who are just starting out and tend to have smaller portfolios.

At the same time, there is one main drawback to take note of when buying fractional shares. Because fractional shares allow you to buy a stock at any amount, you can end up paying more in fees percentage wise if your trades are very small.

For example, if your brokerage charges $5 per trade, a $1,000 stock purchase will work out to 0.5% in fees. But if you only made a $100 stock purchase (easy with fractional shares), your fees now work out to 5%. Because of this, it’s important to pick a brokerage that offers fractional trading with low fees!

Brokerages that offer fractional trading

Many well-known U.S. brokerages like Interactive Brokers, Robinhood, Fidelity, and Charles Schwab offer fractional trading for U.S. stocks. Out of these, only Interactive Brokers is available in Singapore. Besides Interactive Brokers, Syfe is now the only other brokerage in Singapore to offer fractional trading for U.S. stocks.

Syfe is a digital investment platform that’s already well-known in Singapore for its robo-advisor investment portfolios. Building on the success of its robo-advisor services, Syfe is launching Syfe Trade, a digital brokerage, that will offer investors fractional trading for U.S. stocks and ETFs. With fractional trading, you can now buy into the world’s largest companies regardless of share price and build a diversified stock portfolio even without a large amount of capital.

Syfe Trade offers five free trades every month in the introductory period, and two free trades every month thereafter. It offers the lowest fees in the market at just US$0.99 per trade during its introductory period from now to 31 March 2022. (You can compare Singapore brokerage fees for U.S. stocks here.) Syfe Trade also has zero platform fees, zero withdrawal fees, and no account minimum or inactivity fees. 

Syfe Trade also allows you to buy and sell your fractional shares in real-time, just like full shares, which means you always know the share price you’re transacting at. In contrast, some brokerages may group multiple orders of fractional shares to add up to full shares before executing the trade, which will impact the final price you pay or receive for a fractional share order.

You’ll also be able to receive dividends on your fractional shares, in proportion to the amount of fractional shares you own, and receive similar voting rights as that of full share position holders.

Syfe Trade will officially go live on 18 January 2022, but you can join the waitlist right now to gain early access and stand a chance to win an iPhone 13. Winners will be announced on 24 January 2022, and 10 iPhone 13s will be up for grabs!

You can also earn more than S$200 in cash credits when you sign up. Eligible clients can earn cash credits when they open and fund their Syfe Trade account, execute their first trade, and refer friends to Syfe Trade. These cash credits will be reflected as an increase in your buying power. You may use them as an investment credit to buy any U.S. stock or ETF of your choice on Syfe Trade. Full T&Cs here.

The fifth perspective

Fractional trading is an extremely useful tool that allows anyone to start investing with a small amount of capital or a specific allocation, and build a diversified portfolio of the world’s largest companies regardless of their stock price.

There are no real disadvantages to fractional shares unless you get careless with your trades because of the many options now available to you. Stick with a low-cost brokerage to save on fees, especially if your trades are small. For this reason, Syfe Trade is a great option as they currently offer the lowest fees in the market and a number of free trades every month.

If you’re concerned about safety, you might be happy to know that Syfe is regulated by the Monetary Authority of Singapore (MAS) as a capital markets services licence holder.

Interested? Join the waitlist now to gain early access to Syfe Trade.

Disclaimer: Not financial advice. Please do your own research before working on investments at your own risk. Any form of investment carries risks, and you should not interpret my returns as what you’ll get. Always do your own research before investing! This advertisement has not been reviewed by the Monetary Authority of Singapore.

This article was written in collaboration with Syfe.

Adam Wong

Adam Wong is the editor-in-chief of The Fifth Person and author of the national bestseller Lucky Bastard! which made the Sunday Times Top 10 Bestseller's List in 2009 and Value Investing Made Easy which made the Kinokuniya Business Bestseller's List in 2013. In 2010, he appeared on U.S. national television on the morning show The Balancing Act. An avid investor himself, Adam shares his personal thoughts and opinions as he journals his investing journey online.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back to top button