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What Are Fractional Shares
In stock trading, fractional shares refer to less than one full share of stock.
As the name suggests, fractional shares represent a fraction of one whole share.
Typically, you may end up with fractional shares when there’s a stock split, stock consolidation, dividend reinvestment plan, or you may be able to buy a fraction of a share through your stock broker.
For example, if you have a dividend reinvestment plan, the amount of dividend that you’re entitled to may not be enough to buy one whole share.
As a result, you will get a fraction of a share when your dividend gets reinvested.
Next, I will explain to you how fractional shares work and provide you with their pros and cons.
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How Fractional Shares Work
Fractional shares represent less than one whole share of a company’s stock.
You can acquire fractional shares in several ways:
- Through your online brokerage firm
- If you have a dividend reinvestment
- If there’s a stock split or consolidation
- If there’s a corporate stock reorganization of some kind
Today, many online brokerage firms give you the possibility to purchase fractional shares.
For example, if you have $1,000 to invest and the stock you wish to buy trades at $2,000 per share, you will not be able to invest in this stock unless you buy 0.5 shares.
Similarly, shareholders that have a dividend reinvestment will also end up with fractional shares.
For instance, the company pays a dividend of $1.00 per share where the investor owns 100 shares.
However, each share trades for $500 per share.
In your dividend reinvestment plan, your $100 will be used to purchase 0.2 shares.
You can end up with fractional shares when there’s a stock split, consolidation, or reorganization of some kind.
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Benefits of Fractional Shares
There are several key benefits to being able to acquire fractional shares.
The first advantage is that you can acquire shares in virtually any company of your choice.
For example, if you had $5,000 to invest, you can choose to split your investment into five portions of $1,000 and acquire shares of five different companies no matter the stock price.
As a consequence, having the ability to buy fractional shares allows you to diversify your portfolio even though you may not have important amounts to invest.
Another important advantage of fractional shares is that you can get the most out of your investment through dollar-cost averaging.
Dollar-cost averaging is an investment strategy where you regularly contribute a fixed amount to your investment account every month.
If you contribute $200 per month to your investment account, you will be able to purchase fractional shares every month.
Otherwise, you will need to accumulate your cash until it’s enough to buy one whole share.
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Drawbacks of Fractional Shares
Although fractional shares have important advantages, you should also be mindful of their drawbacks.
The most important drawback is that it is much more difficult to buy or sell a fraction of a share than it is with one whole share.
In some cases, you may want to sell your investment urgently to realize the cash and you may find that your broker will have a harder time selling the fractional shares.
Another drawback to fractional shares is that you cannot easily transfer them from one broker to another broker.
If you are looking to move your shares to a new broker, you will be able to transfer your whole shares and sell your fractional shares through your current broker.
Another drawback to fractional shares is that you may not be able to exercise any voting rights on corporate matters if you own less than one share of the company.
As a result, you may not be able to exercise your shareholder rights the same way as when you own an entire share of stock.
Fractional Shares Example
A fractional share is when you own less than one whole share of a company.
For example, Company ABC’s stock trades at $3,000 per share.
If you had only $1,500 to invest, you do not have enough to purchase one whole share of Company ABC’s stock.
However, if your brokerage firm allows you to purchase fractional shares, you will be able to invest your $1,500 to get 0.5 shares.
In essence, you own half of one share (which is a fractional share).
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Fractional Shares FAQ
What is a fractional share?
“Fractional shares” are simply a portion of one whole stock.
As the name suggested, you have a fraction of one share.
For example, 0.3 shares or 0.7 shares are fractional shares as they are less than one whole share.
Can I buy fractional shares?
Yes, you can buy fractional shares through many online brokerage firms.
If you start a dividend reinvestment plan, you may also be eligible to purchase fractional shares.
Can I sell fractional shares?
Yes, you can sell fractional shares just like you can sell a whole share.
For example, if you have 0.8 shares of a stock worth $1,000, you can sell your fractional shares and collect $800 from your broker.
Do all brokers handle fractional shares the same way?
Not all brokers handle fractional shares the same way.
If you want to know the terms and conditions associated with trading fractional shares, you should speak to your broker or read the terms of your brokerage account.
What is the difference between fractional shares and whole shares?
The main difference between fractional and whole shares is that one is a fraction of one share and the other is an entire one.
For example, 0.2 shares is a fractional share, representing 20% of 1 whole share.
On the other hand, 1 share is a whole share.
Takeaways
So there you have it folks!
What are fractional shares and how do they work?
In a nutshell, fractional shares are pieces of a whole share of a company.
For instance, if you own 0.5 shares of a company stock, you own fractional shares.
Fractional shares are beneficial for investors who are just starting out and may not have a lot of capital to invest in pricy stocks.
In recent years, many online brokerage firms now offer their clients the ability to buy fractional shares allowing investors to invest in virtually any company of their choice for any amount.
In addition to buying fractional shares, you can acquire them through a dividend reinvestment plan.
If you’re interested in buying fractional shares, make sure you verify with your brokerage firm to see if they offer this feature and the rules applicable to such transactions.
Now that you know what fractional shares are and how they work, good luck with your investments!
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