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Definition:
A fractional share is a small increment of equity (less than a full share) in a stock or exchange-traded fund.
🤔 Understanding a fractional share
A fractional share is a part of one share of stock. Fractional shares are often the result of financial decisions or actions by a company. For example, stock splits may result in fractional shares if an investor has an odd number of stocks. If two companies merge, they often combine stocks using an agreed upon ratio that may generate fractional shares. If you reinvest your dividends as part of a dividend reinvestment plan, you could end up with fractions of a share. You normally can’t buy or sell a fractional share on the stock market, but a brokerage firm can bundle several together to make a full share, sell you a percentage to complete your share, or split up full shares to sell fractional shares to new investors. Remember to always be mindful of trading fees, and all investments carry risk.
Example
Let’s say the fictional company Great Big Giant Co. has a stock that trades for $2,000 a share. A brokerage firm whose clients might like to own a piece of Great Big Giant Co. — but can’t afford even one share at that high price — could offer fractional shares: One-half share for $1,000, or one-quarter share for $500, etc.
Takeaway
A fractional share is like a slice of a gem...
If a share in a company is like a gem, a fractional share is like a slice of that jewel. Not everybody wants (or can afford) an entire gem, but these jewels can be broken into smaller pieces.
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Tell me more…
- How do fractional shares work?
- What are the benefits of fractional shares?
- How do you buy and sell fractional shares?
- How are dividends affected by fractional shares?
- Can you buy fractional shares of ETFs?
- What happens to fractional shares from reinvested dividends when you sell?
- What brokerages offer fractional shares?
How do fractional shares work?
Fractional shares are exactly what they sound like — A fraction of a share instead of the whole share. Because a fractional share is less than a whole share, it allows those interested in fractional share investing to buy in smaller dollar amounts. If you’re a beginner investor interested in a large company with high share value and cannot afford a whole share, you might approach a brokerage firm with the dollar amount you want to spend, and buy a fractional share that corresponds to that dollar amount. Not all brokerage firms offer this option.
What are the benefits of fractional shares?
Fractional shares allow you to invest in a company even if the value of its stock may put a full share out of reach for you. It also can potentially give you more flexibility, allowing you to diversify your portfolio, and reduce risk.
Fractional share investing can also help you if you’re partial to dollar-cost averaging. This is when you regularly put a fixed amount of money into an account — be it a 401(k), an HSA, or an investment account — over a period of time. Say you receive a paycheck every other week and elect to transfer $100 of it directly into your brokerage account. Maybe that $100 won’t buy an entire share of stock at a company you’re interested in, but it can buy smaller fractional shares in a diverse array of stocks over time. Not all brokerage firms offer this option.
Keep in mind diversification and automatic investing do not ensure a profit and do not protect against losses in declining markets.
How do you buy and sell fractional shares?
Some brokerage firms allow you to buy fractional shares. Firms may execute fractional orders in different ways. One example may be that the firm will buy or sell whole shares of any given stock, and then track which client owns which fractional portion of each share.
However, buying fractional shares isn’t the only way to end up with them. Fractional shares are often the byproduct of financial maneuvers by companies, such as stock splits. For example, in a 3-for-2 stock split, an investor with an odd number of shares would end up with fractional shares — in that case, for example, 5 shares would become 7½.
Fractional shares can also come about as the result of a dividend reinvestment plan, where dividends are immediately put to work buying more stock — but perhaps a bit of leftover cash won’t be enough for a whole share. A successful company may choose to reward its investors with a share of its profits; this can come in the form of a dividend paid out once or several times a year, in an amount corresponding to the number of shares each investor holds. The dividend payout can then be reinvested in company shares, and often in fractional shares. A dividend reinvestment plan sets this transaction to occur regularly and automatically.
Mergers and acquisitions can also create fractional shares, as companies may combine a new common stock based on a predetermined ratio. This will create a certain number of new shares out of old shares in a method that is similar to a stock split. For example, if Company A buys out Company B, the two could decide together that investors will now receive half a share of Company A stock for every share of Company B stock they held. If you were an investor in Company B and owned 5 shares of its stock, you would now own 2½ shares of Company A stock.
How are dividends affected by fractional shares?
A company may choose to reward its investors with a share of its profits; this can come in the form of a dividend paid out once or potentially several times a year, in an amount corresponding to the number of shares each investor holds. Just as owning shares of a company allows an investor to receive dividends, owning a fractional share allows an investor to receive a dividend, too –– just a corresponding fractional amount.
Can you buy fractional shares of ETFs?
Just as you can buy fractional shares of a single stock, you can also buy fractional shares in some exchange traded funds (ETFs). Much like fractional shares in company stocks, fractional shares in ETFs can allow you to diversify your stock portfolio, thereby potentially reducing risk. Just as you can approach a broker or brokerage firm with an amount of money and use it to buy a fractional share of a stock, you can also use that money to buy a fractional share in some ETFs. When it comes to buying and selling, fractional shares in ETFs operate under the same principles: You’ll go through a brokerage firm at both ends of the deal, and the shares may have certain conditions or fees attached to them.
What happens to fractional shares from reinvested dividends when you sell?
Fractional shares from reinvested dividends can be sold the same way an investor would sell fractional shares acquired by any other means. In most cases, as an investor you’ll work through a middleman (usually a brokerage firm) to sell fractional shares. The firm may take your fractional share and bundle it together with others until it has a whole share to sell, or it may resell your fractional share to someone else who wants it. Some companies may buy your fractional share directly, but only if you sell all of your shares in the company at once.
What brokerages offer fractional shares?
Some brokerage firms allow the buying and selling of fractional shares. Always do your own research and be aware of fees, and that all investments carry risk.
Ready to start investing?
Sign up for Robinhood and get stock on us.
Sign up for Robinhood
Certain limitations apply
New customers need to sign up, get approved, and link their bank account. The cash value of the stock rewards may not be withdrawn for 30 days after the reward is claimed. Stock rewards not claimed within 60 days may expire. See full terms and conditions at rbnhd.co/freestock. Securities trading is offered through Robinhood Financial LLC.
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As a seasoned financial expert with a deep understanding of investment concepts and practices, I can confidently break down the information provided in the article, leveraging my first-hand expertise and comprehensive knowledge of the topic.
Fractional Shares: Demystifying the Gem of Investment
The article begins by defining fractional shares as small increments of equity, representing less than a full share in a stock or exchange-traded fund (ETF). This fractional ownership often arises from various financial decisions and actions taken by companies, such as stock splits, mergers, or dividend reinvestment plans.
Understanding Fractional Shares: The concept of a fractional share is elucidated as a part of one share of stock, resulting from circ*mstances like stock splits or mergers. The example of a stock trading at $2,000 per share illustrates how brokerage firms can offer fractional shares to investors who may not afford a whole share at such a high price.
Benefits of Fractional Shares: The article highlights the benefits of fractional shares, emphasizing their role in enabling investors to access high-value stocks with smaller dollar amounts. Fractional shares offer flexibility, allowing for portfolio diversification and risk reduction. The concept of dollar-cost averaging is introduced, explaining how regular investments over time, even in smaller amounts, can contribute to building a diversified portfolio.
Buying and Selling Fractional Shares: The process of buying and selling fractional shares is explored. Some brokerage firms offer the option to purchase fractional shares directly, while others may generate fractional shares through corporate actions like stock splits, mergers, or dividend reinvestment plans. The importance of being mindful of trading fees and understanding the associated risks is emphasized.
Dividends and Fractional Shares: The article discusses how dividends are affected by fractional shares, clarifying that owning fractional shares allows investors to receive corresponding fractional dividend amounts. It also explains how dividend reinvestment plans can result in the accumulation of fractional shares.
Fractional Shares of ETFs: Similar to individual stocks, the article explains that fractional shares of ETFs can be bought, providing investors with an avenue to diversify their portfolios. The buying and selling principles for fractional shares in ETFs are likened to those of individual stocks.
Selling Fractional Shares from Reinvested Dividends: The process of selling fractional shares, particularly those obtained through reinvested dividends, is detailed. Investors typically work through a brokerage firm to sell fractional shares, which may involve bundling them together or reselling them to interested buyers.
Brokerages Offering Fractional Shares: The article mentions that not all brokerage firms provide the option to buy and sell fractional shares. Investors are encouraged to conduct their own research, considering fees and risks associated with fractional share investments.
In summary, fractional shares serve as a gateway for investors to engage with high-value stocks, offering flexibility, diversification, and the potential for risk reduction. The article provides a comprehensive overview of the concept, guiding readers through the intricacies of buying, selling, and understanding the implications of fractional shares in various investment scenarios.
