When a beginner is about to invest in the stock market, they may find many barriers to trading, one of which may be the value of shares. In this case, fractional shares can help. In this article, we will explain what they are, and what are the advantages and disadvantages of this financial instrument.
To understand how fractional stocks work, you need to understand how common stocks work. Simply put, a stock is a share of a company’s business. Often, an investor makes a profit from changes in the value of their shares.
A fractional share is a smaller part of one share. The company’s share is divided into smaller parts for investors who do not want or cannot afford to buy the whole share. Fractional stock trading is great for beginners or traders who want to diversify their portfolios more flexibly and reduce trading risk.
With fractional shares, you can buy a stake in a business without having to pay the full price of the share. Instead, the trader uses whatever amount he has to trade.
For example:
You have $100 to trade, but the stock you want to buy is trading at $2,000 a share, which makes it too expensive. Thanks to fractional shares, you can invest $100 by buying part of one share.
Fractional stocks allow traders to buy shares in increments appropriate to their financial situation. On the EXMO Margin platform, you can also use leverage to increase your trading volume. Using the same $100 and 20x leverage, you can buy the equivalent of one share and get a full profit on the difference in value.
Advantages
The main advantages of trading fractional shares:
- Less capital is required to invest in shares, as users only purchase a share of a share.
- The opportunity to acquire different stocks with the same amount of trading capital. This allows better diversification of the portfolio.
- The ability to easily buy assets of interest.
- Leverage. It allows you to open positions with a large volume and, accordingly, fix more profits from trading.
Disadvantages
It is important to note the disadvantages:
- Users waive their right to vote. Shares are not transferable outside the trading platforms.
- All the risks associated with trading in common stocks. General volatility, a bad report that could trigger a price drop, general economic problems, and so on.
Where do the stock prices traders see on the stock exchange come from?
Share prices are based on the current NASDAQ and NYSE indices. They absolutely exactly match the quotes that are presented on the main US stock exchanges. Hours of operation are also the same.
Working with orders and positions on a closed market
- You cannot create orders in a closed market. The user needs to wait for the stock market to open (9:30 New York time).
- The user can cancel their order after the market closes, but they cannot edit an order in a closed market.
- There is the possibility to add a margin while the market is closed.
- It’s impossible to reduce the margin while the market is closed.
- A trader cannot close a position while the market is closed.
Conclusion
With fractional stocks, a trader can acquire certain stocks and ETFs that are worth tens, hundreds, or even thousands of dollars a piece for just a couple of dollars. This allows for more flexible trading. Using leverage, a trader can easily trade stocks and ETFs they believe in and profit from their analysis. Fractional stocks can also help you manage risk more comfortably. Since you are not tied to buying full shares, you can diversify your portfolio with less capital. This is a great opportunity to get acquainted with the world of the stock market.
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