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 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.

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 investors to invest in big companies where the price of the share is too high.

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.

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

• The first and foremost reason to buy such shares is the limitation of a fund with the investor.
• They are used as part of the dividend reinvestment plan. Since dividend does not provide enough money to buy a share, a fractional share turns out to be a good option. Here since broker intervention is not there, it also costs low.
• They enable anyone to trade with the money they have. Since high entry costs can be a difficult barrier, it makes entry into the market with shorter funds
• Also, technology is a big boom in this share. Traditionally, breaking up big shares into smaller chunks was a difficult task, but with the growing technology and introduction of fractional shares, now working up with dividing the shares into a lower value is an easy task.
• One of the positive reasons to buy these shares is that they are meant for risk-averse investors and allow them to test the market in their initial learning.

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

• Diversification: An investor can diversify its portfolio with multiple stocks when he has traded with fractional shares. Even if one chooses the cheaper stock, he can pick up more than ten or more of such stocks to make a more significant portfolio and diversify the loss and profit. Diversification helps in lowering the risk while increasing the profit potential in the long term.
• Flexibility: They provide flexibility so that not all your money needs to be invested. Accordingly, investors may invest in multiple such stocks to enlarge diversity in a portfolio.
• Money can be Used All Time: It helps the buyer use all their money at all times. For example, if an investor wishes to buy a stock of ABC inc. Having a share price of $400 but only $50, such an investor can purchase fractional shares of ABC Inc. Accordingly, investors need not wait until he has enough money to buy the one total share of a particular stock.
• Excellent Opportunity for Newer Investor: For the newbie investor, investing in these shares can be an excellent start to learning and exploring with less risk. The newer investor can apply his strategies and learnings within the market.

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.

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.

This article has been a guide to what is a Fractional Share. Here we explain how to invest in fractional shares along with benefits and limitations. You can learn more about fixed income from the following articles –

• B Shares
• Bearer Share
• Share Classes
• Shares Issued
• Contingency Reserve