Fractional Share

What is a Fractional Share?

Fractional share can be defined as the portion of stock which is less than one complete share which 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.

Explanation

The company’s capital is divided into small parts known as shares. Sometimes these shares are also split up in small pieces known as fractional shares. These shares cannot be purchased directly from the market either can be sold; the only way to sell these shares is through with the help of brokerage firms. Selling of 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 with the motive of selling 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.

Fractional Share

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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 say, for example, a retail investor is willing to invest in substantial companies having high share price in the market with high value for speedy growth but has lower funds. Still, due to insufficiency of funds he can’t buy the full share. In this case, he can approach a brokerage firm which 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.

How Does it Work?

Fractional shares are an essential innovation that takes place in online investing. Whenever an investor thinks of investing in shares, it is generally invested in one complete equity share, but under the concept of a fractional share, a part of a slice of share can be purchased when investing in a large company. Sometimes even a single share cost very high for an investor. In such a scenario, this share comes into practice. Suppose XYZ company’s share is selling at a price of $200. Under this concept, a part of XYZ’s share can be bought at say, one-fourth of share, which will be valued at $50. The higher the value of the stock more will be the value of fractional shares. They might not be as valuable or necessary for the low value stocksValue StocksValue Stock is one that has the potential of selling at a higher price but due to the company’s adverse condition in the market, the stock is trading at a lower price than its actual worth based on its earnings, dividend, or sales.read more as investors may invest in such shares directly.

Reasons to Buy Fractional Shares

Benefits

Limitations

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

Conclusion

Trading in fractional shares is possible with a small number of monetary funds. Also, it helps to diversify an investor’s portfolio. Share split may not always result in an even number of remaining stocks. These trades are an excellent opportunity for small and new investors as they provide more returns with lesser less risk.  One of the significant drawbacks of these shares is the difficulty of trading, i.e., the only way to trade in fractional shares is through the major brokerage firms.

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