Should you invest in fractional shares?

Fractional shares will officially become a permitted investment in Individual Savings Accounts (Isas), the government said in last week’s Autumn Statement, in a welcome move for young investors. The ability to buy portions of shares makes it easier for small investors to gain exposure to expensive stocks, especially those listed in the US.

But there are pros and cons to using fractional shares. Only a handful of platforms offer them at all. Freetrade, Moneybox and Trading 212 are the main platforms where investors can hold fractions in Isas, and they have been locked in a dispute with HMRC over whether the current rules allow it. The Autumn Statement did not contain the full details on how Isa rules will change, only stating the government’s intention to “engage with stakeholders on implementation”.

Moneybox’s head of personal finance Brian Byrnes welcomed the government’s announcement, and Freetrade’s chief executive Adam Dodds called it “a victory for ordinary investors”. But HMRC indicated that the matter is far from closed. “We are working closely with the finance industry to discuss allowing certain fractional shares to become permitted Isa investments. Until the consultation is complete and changes implemented, our long-standing view that a fraction of a share cannot be held in an Isa remains in place,” the organisation said.

Pros and cons

The share price of many US companies is prohibitive for small investors. The most eye-catching example is Warren Buffet’s Berkshire Hathaway (US:BRK.B), whose A shares currently sell for a whopping $549,000 (£437,000) each. Its B shares trade at a more reasonable but still expensive $360 apiece, and a number of other US companies are priced at more than $100 per share, including all the so-called Magnificent Seven.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, argued that fractional shares could encourage new investors into the stock market and help them build a more diversified portfolio. If you like investing in single-company stocks and want to dip your toes in the US market, fractional investing allows you to hold a reasonable number of stocks even if you only have a small sum to allocate. Additionally, Freetrade and Trading 212 focus on offering trading with no fees, which combined with fractional shares gives you a lot of flexibility in building your portfolio.

But fractional shares are not the only option to gain exposure to the US and are not necessarily right for everyone, Streeter added. “If you want exposure to a large tech firm like Apple (US:AAPL) for example, an alternative is a fund which invests in such stocks – which has the added benefit of diversification,” she said.

The fact that the main platforms do not offer them is also worth keeping in mind. With the dispute with HMRC still partly open, it might be a while before that changes, which limits your choice of platforms. Fractional shares cannot normally be transferred and need to be liquidated if you want to switch providers.