A Quick Guide to Fractional Investing and Crowdfunding
Only a few years ago, it used to be the case that reaping any sort of benefit from investing in the stock market required an initial outflow of a few thousand dollars. For this reason, many average Americans wrote off the stock market as a viable wealth-building opportunity.
Fractional investing is all about empowerment. It gives average investors (meaning non-accredited investors) more options and opportunities to grow their wealth by providing access to asset classes that were previously out of reach.
What is fractional investing?
Fractional investing can be described as a way to buy partial shares or securities. Instead of waiting until you have the hundreds (or thousands) of dollars necessary to buy one of the securities you are interested in, your brokerage can split that security among other interested investors. Many large investment platforms now offer fractional shares for no additional cost.
How is that different from crowdfunding?
While fractional investing is mostly focused on securities available on a stock exchange, crowdfunding has a much larger scope and application. Crowdfunding has also been around for many years and has become a staple form of investing in the startup and real estate world.
Real estate crowdfunding can maximize your portfolio’s rate of return while providing steady income. Investors in real estate crowdfunding can buy, hold, and sell fractional ownership in real estate assets, like they trade stocks. These assets can range from multifamily units to industrial complexes, hospitals, malls, and more.
Real estate crowdfunding gives investors all the benefits of real estate investing—stable dividends from rent and capital appreciation, diversification in recessions, above-average returns—without the hassle of property management.
The benefits of crowdfunding and fractional investing
This gives smaller investors the benefit of exposure to the market and diversification with a lower barrier to entry. The brokerage benefits by gaining access to many more investors who may grow their investments (and thus pay more fees) over time or buy other products and services from the brokerage. There are other benefits to this new trend in investing:
- Convenience: For people who get paid weekly, bi-weekly, or intermittently, the only option used to be to save in cash until they had enough money to invest in the securities they wanted. For students and young adults, this could be a deterrent to start investing early. Now, not only can you start investing with only a few dollars, but it is easier to set up automatic contributions and budget for savings
- Affordability: As we mentioned earlier, crowdfunding and fractional shares have made investing more affordable than ever. It is also affordable to truly diversify your portfolio, which was previously only available to wealthy individuals or institutions
- Opportunity: Want to invest in a burger-flipping robot? What about a video game that teaches coding? Crowdfunding lets you support businesses that are working on what you are truly passionate about
The new diversified portfolio
You may have heard of conventional “rules” that essentially force you to pick an arbitrary percentage to invest in the stock market and keep the remainder of your portfolio in cash or money market funds. Additionally, the relationships between asset types (for example, gold being a hedge for USD) that were previously presented as fact do not seem to always hold true anymore.
The Bottom Line
With fractional investing and crowdfunding rising in popularity, investors now have the option to truly diversify their asset base. An average investor can now invest seed money into a startup, lend to small local businesses, partially own real estate properties anywhere in the country, and hold stocks for dozens of companies. All of this is possible through crowdsourcing and fractional investing. Our key takeaway is that there is a large variety of investments now available through crowdfunding and fractional investing in terms of potential returns, risk tolerance, fees, time horizons, and other factors, so it is likely that there’s something out there that’s right for every investor.