07 Sep Are fractional shares a smart way to start investing?

Q. My son is 31 years old and he has started to dabble in purchasing fractional shares of stock as a way to start investing. How does this work? What should he know?
— Concerned

A. This is definitely the new trend among some investors, but it’s not without risk.

Purchasing fractional shares through an app or online brokerage firm is a relatively new phenomenon, said Ken Van Leeuwen, a certified financial planner with Van Leeuwen & Company in Princeton.

Here’s how it works.

The first — or the custodian — owns the shares and then divides them based on the amount of money people are willing to invest, he said.

How does the firm makes money because they usually do not charge “fees” or “commissions?”

“It’s by selling the slices of shares at a higher price than a single share of the stock purchased on the open market at the same time,” Van Leeuwen said. “On the other hand, there is not a real open market for fractional shares. You would be required to sell them back to the firm.”

Van Leeuwen said the earlier you can begin saving and investing, the better off you will be in the long run.

“There is not anything fundamentally wrong with purchasing fractional shares,” he said. “Just be careful when selecting your investments. Do your research and look at the long-term picture.”

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This story was originally published on Sept. 7, 2020.

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