Walt Disney (NYSE:DIS) theme parks are open to the public again, everyone you know is queuing up Black Widow on Disney+, and Disney Cruise Line will finally resume sailing again from Florida in early August. Those are good signs for the Mickey Mouse company and for its shareholders.
Even so, Disney stock hasn’t taken off this summer. It pulled back after gains earlier in the year, and the stock price has been hovering in the $170 to $180 range since early June. The optimistic investor with cash on hand might see this as a buying opportunity — to get in on Disney stock now before the company fully regains its stride in a post-pandemic world.
But even investors who are strapped for cash have the opportunity to add Disney to their portfolios. The solution is fractional investing, which is just what it sounds like: Buying fractions of stock instead of whole units.
Disney for one-tenth the price
Let’s say your budget for buying Disney stock this month is $20. If your broker supports fractional investing, you can buy one-tenth of a share of DIS for about $18. Your Disney position will function mostly the same as a full share of stock, but on a smaller scale. Specifically:
- If Disney declared a dividend, you would be entitled to 10% of the shareholder payment.
- If Disney’s share price rises or falls, the value of your position would go up or down by an equal percentage.
- Depending on your broker’s rules, you may have voting rights as a shareholder.
Potential pitfalls of fractional investing
Fractional investing has its advantages. You can get into a trendy stock at a lower price point. Even better, you can build a fully diversified portfolio of stocks for $100 or less. (The broker defines the minimum buy amount, but it’s usually $1 to $5 per trade.)
Alongside those advantages, there are downsides. For example:
- Your broker may charge you a fee for selling fractional shares. Generally, brokers that offer fractional investing don’t charge anything to buy stock fractions. But you may incur a fee for selling.
- You can’t transfer your fractional shares to another broker. If you want to switch brokers, you’d sell your fractions and transfer them to your new account as cash.
- You won’t have access to the full universe of stocks and exchange-traded funds (ETFs). Brokers decide which stocks and ETFs they’ll offer fractionally. Charles Schwab, for example, offers fractions on any S&P 500 company. Robinhood supports fractional investing for companies valued at more than $25 million with a trading price of at least $1.
- When you’re only spending $1 at a time, it’s easier to overlook the risks of investing. The price point is lower, but you can still lose money. You must remain disciplined about making informed investing decisions.
Getting the most from your fractional shares
It’s awesome to get a stock you love for a price you can afford. Your investing work doesn’t end with a single $20 purchase of Disney, however. Follow these guidelines to get the most from your fractional shares.
- Be consistent. You’re not going to get rich off one $20 investment. Plan on investing $20 a month or week — whatever you can afford — for the foreseeable future. To gain momentum, take every opportunity to increase your investing budget.
- Complement your Disney position with other stocks in different sectors. Also hold some of your wealth in cash and government bonds. This way, you won’t feel the full force of every stock market dip.
- Buy and hold. Invest in solid, mature companies and hold those positions indefinitely, or until the company’s situation changes fundamentally. Tiny stock positions will only generate tiny gains in the short term. Play the long game.
- Reinvest your dividends. If you do earn dividends from your fractional shares, reinvest. This expedites your growth.
The happiest place
If Disney’s future looks bright to you, go ahead and invest. With fractional investing, you can do it on your terms to start, and then build out your portfolio over time. As you add to your collection of fractional shares, you may realize that the happiest place on earth isn’t nearly as fun as pursuing and achieving your financial goals.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.