Fractional shares offer another way to invest, allowing individuals to purchase a portion of a share rather than a whole one. Image: William Potter/Shutterstock.com
By: John GrobeIf you want to invest in the stock market and don’t have enough money to buy individual shares in publicly traded companies, there are alternatives: Mutual funds, or exchange traded funds (ETFs). This article will explore the difference between the two, and also look at owning fractional shares, which is what it sounds like.
Mutual funds are portfolios of investments (e.g., stocks, bonds, etc.) that are purchased with the pooled capital of investors. They have been around since the mid-1920s but didn’t get popular until around 40 years ago. As late as 1980 less than 6% of American households had any money invested in mutual funds. Contrast that to the end of last year when over half (52%) had mutual fund investments.
Do you have mutual fund investments? Yes, you do if you’re investing in the Thrift Savings Plan. The C, S, I, and F Funds are index mutual funds; that is, they invest in broad market indexes (e.g., the C fund tracks the Standard & Poor’s 500). You can also invest through the TSP’s relatively little-used mutual fund window, where you can hold mutual funds in your TSP as long as you have an overall balance over $40,000.
There are many other types of mutual funds that are available outside of the TSP. In fact, depending on whose numbers you believe, there are more mutual funds than there are stocks available. There are roughly 9,000 mutual funds out there and several months ago, an article on CNN.com said there were only 4,300 publicly traded companies. In researching this article, I also found sources that claimed there were anywhere between 8,000 and 10,000 stocks available. However you look at the numbers, there’s a whole bunch of mutual funds out there.
Mutual funds hold a lot of retirement assets. The Investment Company Institute claims that the 52% of Americans who invest in mutual funds hold a whopping 88% of mutual fund assets. You’re among this group if you save for retirement in the TSP.
Exchange traded funds (ETFs) are also pooled investment vehicles. They, however, trade on exchanges just like a stock does. ETFs were first introduced in Canada in 1990. The first American ETF was the SPYDR which tracks the Standard and Poor’s 500 and was introduced in 1993. ETFs are not available through the Thrift Savings Plan, though most brokerage houses offer them, and they can be held within retirement accounts such as an Individual Retirement Arrangement (IRA).
Though both a mutual fund and an ETF are pooled investment vehicles, there are a few differences between them. According to Fidelity Investments, ETFs, in general, have lower expenses than mutual funds, though there are exceptions. Also, ETF prices fluctuate all day as the ETF is bought and sold, mutual funds, on the other hand trade only once a day after the market closes.
Will the Thrift Savings Plan ever offer ETFs? The Thrift Board doesn’t appear to be considering that option. But, never say never; the TSP has made many changes, especially over the last five years since the Thrift Savings Plan Modernization Act in 2019.
Fractional shares offer another way to invest, allowing individuals to purchase a portion of a share rather than a whole one. This option opens up investment opportunities in high-priced stocks for those with limited funds, making it accessible for investors to diversify their portfolios.
Fractional shares represent a portion of a single stock share, allowing investors to buy stock based on their available budget rather than needing to purchase whole shares. This investing method is particularly advantageous for those interested in high-priced stocks that might be otherwise inaccessible due to financial constraints.
With fractional shares, investors can specify the dollar amount they wish to invest, and the brokerage will calculate and allocate the equivalent partial share. This approach not only democratizes access to prominent stocks but also enables more precise portfolio diversification, as investors can spread smaller amounts across different sectors and companies. Offered by several modern brokerage platforms, fractional shares have become a useful tool for those looking to enter the stock market and enjoy benefits proportional to their investment size, including dividends and capital gains.
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