You don’t have a lot of money to invest. Check. You want to buy shares in big established companies with out-of-reach price tags. Check. You want to have a diversified portfolio. Check. Fractional shares are obviously for you and since Schwab (which calls them stock slices) offers them, you may wonder if they are worth it.
Schwab stock slices provide an easy way to diversify your portfolio with a trusted broker. However, Schwab does not offer stock slices for companies outside the S&P 500. Furthermore, Schwab does not offer stock slices worth less than $5.
In this article, I will explain two potential deal-breakers when it comes to Schwab stock slices and offers an alternative for getting access to fractional shares.
Why Schwab Stock Slices may not be worth it
If the companies you’re looking to buy fractional shares from aren’t in that index, you’re simply out of luck. Charles Schwab won’t offer fractional shares of stocks outside the S&P 500.
It logically follows that if you got an eye for a certain ETF, you won’t be able to own Schwab stock slices of it through this broker.
You Want to Invest in Stocks Outside the S&P 500 and In ETFs
Those who are looking to attempt at beating the market long-term, they’re basically up against a wall since the S&P 500 is the usual benchmark that best represents it. What I mean is that it’s way harder to beat the index when you buy parts of it since all of these stocks move in lock-step with each other, more or less.
Short-term outperformance is possible, but don’t think that it can be sustainable for decades. The 500 companies in that index are closely followed by institutional analysts and they’re usually valued correctly. In other words, they can’t represent bargains and opportunities for outstanding long-term gains.
As a rule of thumb, the further away you move from the beaten path (market), the more likely you are to beat it.
Now, you may be wondering why Schwab doesn’t offer anything outside the S&P 500. Once you understand what they gain from fractional shares and how they work, it can make sense.
What do they get from offering you stock slices? Apart from giving you something that nearly every broker does nowadays so they can’t afford not to, absolutely nothing.
You see, when you order a fraction of a share from your broker, they need to wait for more similar orders for the same stock and once all of them constitute a full share, buy it for you. Once they do this, they process your order and note that you own a specific percentage of one share of that certain stock.
As you can imagine, this service takes time and requires special resources (algorithms) that automate the process. But if they have to do it with only 500 stocks that are in demand and are frequently transacted, they can fill your orders faster and, therefore, not put you off by making you wait.
With all that being said, if you are looking to invest in well-known US companies though, this drawback will not be a drawback for you.
You Both Want to Invest a Small Amount and Diversify a Lot
If you want to have your cake and eat it too, then you must know that though you can buy fractions of shares and be invested in many companies with only a small fund, Schwab stock slices come with a limitation.
They won’t offer you a fraction of a share that is worth less than $5. This is the required minimum amount for a slice.
So, if you have $100 to invest and want a portfolio of 30 different stocks, I’m afraid you won’t be able to do that with Schwab (a fund of $100 / $5 per slice = a portfolio of 20 stocks).
This is, of course, an issue if you don’t have much money in the first place and you want to have a very diversified portfolio.
Again, the broker goes into trouble if you can put an order for tiny slices of a company’s share because they will need to find many more investors who want to buy slices in the same company to fill your order.
FYI: The best way I've found to invest in ETFs is through M1 Finance. It's free and you even get an instant line of credit! Have a look here (link to M1 Finance).
An M1 Finance brokerage account gives you access to fractional shares but comes with no such strict limitations as a Schwab account.
More specifically, you can buy any stock and ETF you want that is listed on the NYSE, NASDAQ, and BATS exchanges.
And when it comes to the required minimum dollar amount per fractional share, M1 Finance doesn’t have any. You can buy as little as you wish as long as you don’t own fractional shares in more than 500 different stocks in one portfolio (called pie) and you deposit at least $100 to your account.
On top of that, you can continue buying fractional shares automatically on a specified regular basis and automate portfolio rebalancing.
NOTE: The easiest way to add diversification to your portfolio is to invest in real estate through Fundrise. You can become private real estate investor without the burden of property management! Check it out here (link to Fundrise).
All in all, for such an established broker with a resource-rich platform, Schwab stock slices are definitely worth it if you don’t want to have multiple brokerage accounts. But you must be OK with:
- Having access to only the 500 biggest US companies and
- Being limited to buy at least $5 of worth per stock slice
If you’re not, consider the alternative I proposed and you won’t regret it.
Now, thanks for reading my article and I hope you found it useful. If so, please share it with others who may be interested.
Also, if you feel I could help you with something further, don’t hesitate to comment below and I will get back to you as soon as possible.
Take care for now and talk to you the next time…
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