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At the start of 2021, investors could buy AMC Entertainment Holdings (NYSE: AMC) for less than $3 per share. The movie theater stock then rose to eclipse $62 before moderating down to about $29 per share.
Even as AMC’s stock price hovers in the high-20s, however, you can buy a piece of the entertainment company at the low-risk price point of $1.
Fractional shares of AMC
How can you buy AMC stock for $1? Fractional investing is the answer. Fractional investing is what it sounds like — you buy fractions of stock shares instead of whole shares. That fractional share position will cost you a fraction of the stock’s actual trading price.
Say you wanted to purchase one-half of a share of AMC. If the stock trades at $30, you’d pay $15 for your half-share. Again assuming AMC trades at $30 per share, you could buy 0.03 shares for $1.
Image source: Getty Images.
The meme stock phenomenon
AMC is a meme stock, meaning it’s a favorite of loyal investors who’ve banded together in social media communities. Those investors also drove up the price of GameStop earlier this year — in direct opposition to the hedge funds that were betting GameStop would fail.
At the heart of the meme stock movement is the desire to level the playing field between wealthy Wall Street hedge funds and regular, everyday investors.
Hedge funds have the resources to shape public opinion, and that can influence stock prices. Meme stock investors push back against that influence. They believe a stock doesn’t have to fail just because a hedge fund says it will.
Why buy fractional shares of meme stocks?
You might like the idea of supporting meme stocks. It’s like rooting for the underdog in a movie. The “little guy” who wins against all odds is an uplifting story.
The thing is, there’s money involved here. And meme stocks are risky propositions. A look at the share price performance of AMC and GameStop this year proves that. These and other meme stocks are volatile. They’re also less financially secure than many other investment options. There’s a reason hedge funds said they would fail, after all.
With fractional investing, you could show support for meme stocks while managing your risk. Say you have $100 to invest. A $1 purchase of AMC would equate to 1% of your portfolio. You could then diversify your remaining $99 into companies that are more stable, also using fractional shares.
How to buy fractional shares
Fractional investing is enabled at the broker level, but not all brokers support it. Investing apps like Robinhood, Stash, and Betterment do allow fractional buys. Fidelity and Schwab are also options if you prefer to work through a nationwide brokerage.
Because the brokers use their own systems to transact fractional shares, they also set their own rules. Before you start trading fractionally, check on:
The minimum purchase amount. It might be $1 or $5.
How the broker handles voting rights. You may have to own a minimum number of shares before you get voting rights.
How long it takes to settle transactions. Settlement on fractional orders can take longer than traditional orders.
Whether there are fees for buying or selling fractional shares. Often, you can buy fractional shares without a fee, but you may pay a fee to sell.
Also note that you can’t normally transfer a fractional share to a different broker. You’d have to sell first, then move the cash.
Fractional investing for speculative buys
Fractional investing makes it easier to invest small amounts in interesting companies that may not meet traditional investment criteria. If that’s how you plan to use fractional investing, do yourself a favor. Set a cap on your exposure to those speculative buys. Depending on your tolerance for risk, that cap might be 3% or 5% of your overall portfolio.
With that cap in place, you can invest in what you want, without taking on undue risk. If your speculative positions take off, awesome. If they don’t, the other 95% of your portfolio should still be working for you.
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Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Catherine Brock has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.
