Fractional Share

Updated on January 12, 2024
Article byPranjal Jain
Edited byAnkush Jain
Reviewed byDheeraj Vaidya, CFA, FRM

What is a Fractional Share?

A fractional share can be defined as the portion of stock that is less than one complete share that cannot be bought from the market directly and is a result of bonus shares, stock splits, mergers or acquisitions of companies, or dividend reinvestment plans and cannot be sold directly in the market.

Fractional Share

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Fractional shares trading is possible with a small number of monetary funds. These trades are an excellent opportunity for small and new investors as they provide more returns with less risk. Also, it helps to diversify an investor’s portfolio. However, of the significant drawbacks of these shares is the difficulty of trading.

Fractional Shares Explained

The company’s capital is divided into small parts known as shares. Sometimes these shares are also split into small pieces known as fractional ones. These shares cannot be purchased directly from the market nor sold; the only way to sell these shares is through brokerage firms’ help. Selling such shares takes ample time; brokerage firms usually combine multiple fractional shares into a single unit share and then sell shares in the market. Sometimes brokerage firms purposefully split high-value shares into fractions to sell them to their clients. This is the only way for small retail investorsRetail InvestorsA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making.read more to invest in big companies where the price of the share is too high.

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How to Invest in Fractional Share?

These shares are not available for trading in the open market directly. These can only be purchased or sold through significant brokerage firms; for example, a retail investor is willing to invest in substantial companies with high share prices in the market with high value for speedy growth but with lower funds. Still, he can’t buy the full share due to insufficient funds. In this case, he can approach a brokerage firm that intentionally splits the share of such big companies into fractions and sells them at a reasonable lower price so that such small investors can invest in these companies and buy the fractional share. In this way, an investor can invest in these shares with limited funds.

Investors can acquire fractional shares through platforms that offer these services. When an investor places an order for a fractional share, the platform combines multiple investors’ orders to purchase whole shares. The platform then allocates the fractional shares to individual investors based on their investment amount. This opens up opportunities for individuals with smaller investment budgets to diversify their portfolios across different stocks, even those with high share prices.

Fractional share trading makes it possible for investors to invest in companies they believe in, even if the share price is high. It’s particularly beneficial for those engaging in dollar-cost averaging, where investors consistently contribute a fixed amount to their investment portfolio over time.

Reasons to Buy?

Let us understand the very reason why investors take up fractional share investing through the discussion below.

Benefits

Let us understand the advantages or benefits of fractional share trading through the explanation below.

Limitations

One of the significant drawbacks of fractional shares investing is the difficulty of trading, i.e., the only way to trade in such shares is through a major brokerage firm. Suppose the brokerage firm does not find many investors for a single stock that is fractionated, it might end up denying the allotment of these shares. Also, the time to fractionate the share is still higher than purchasing a single lot share. Moreover, the tax assessment of trading in these shares becomes complex.

Fractional Shares Vs ETF

Let us understand the distinctions between fraction shares and equity traded funds through the comparison below.

Fractional Shares

  • Fractional shares represent a portion of a single share of a stock.
  • Enables investors to own a fraction of high-priced stocks, making investing more accessible to individuals with smaller budgets.
  • Investors can diversify their portfolios by investing in multiple stocks, even with limited funds.
  • Typically purchased through platforms that offer fractional investing, facilitating the acquisition of fractions of shares.

Exchange-Traded Funds (ETFs)

  • ETFs are investment funds that hold a diversified portfolio of assets, such as stocks, bonds, or commodities.
  • Traded on stock exchanges like individual stocks but represent ownership in a fund with a broader asset base.
  • Provides instant diversification as a single ETF may hold a basket of different assets.
  • ETFs can be bought and sold throughout the trading day at market prices, offering liquidity to investors.

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