What Are Fractional Shares? How Do They Work?

Oct 28, 2023 By Triston Martin

Big-name equities are becoming more and more expensive. Alphabet, Inc., the parent company of Google, was trading at over $1,500 per share as of August 2020, while Amazon.com, Inc. was trading at over $3,000 per share.

Thanks to the advent of fractional shares, you can now buy expensive stocks and ETFs for as low as one cent a share. New investors who don't have much money to invest in specific stocks or ETFs can benefit from fractional stock purchases. In addition, they allow you to invest in companies that would otherwise be out of your reach.

What Exactly Is a Fraction of a Percentage?

A fractional share is an equity stake that is less than one total share. There may be stock splits, dividend reinvestment plan, or other corporate actions that result in these shares. Fractional shares are uncommon on the stock markets and while they are valuable to investors, they are also challenging to offload.

Fractional Shares: How do They Work?

For the most part, fractional shares function similarly to whole ones. Depending on the brokerage, fractional shareholders may or may not receive the same benefits as full-shareholders, such as voting rights, in percentage terms of profit and loss.

Fractional shareholders have the right to share in any dividends paid out by the company. However, you should be aware of a few drawbacks to buying and selling fractional shares, which we'll go over in the next section.

· Recognizing a Fractional Share

Dividend reinvestment plans, stock splits, mergers, and acquisitions can result in fractional shares.

· Reinvestment of Dividends

Fractional shares are common in dividend reinvestment programmers (DRIPs). In a dividend reinvestment plan, a dividend-paying company or brokerage firm allows investors to reinvest their dividends in additional shares of the company that paid them previously. It is not limited to whole claims when this amount "drips" back into purchasing more shares. Dollar-cost averaging programmers and capital gains reinvestment can also result in the purchase of fractional shares.

· Dividend Payouts

It is not always the case that stock splits result in equal shares. Investors who own an odd number of shares would be left with a fraction of a claim after a 3-for-2 stock split, which creates three shares for every two shares that an investor owns. Three claims would become 412, and five shares would become 712, and so on.

· Acquisitions and Mergers

M&'as can also result in fractional shares because the new common stock is combined with existing inventory in a predetermined ratio. Shareholders often get fractional shares as a result of this ratio.

Brokerage firms have been known to split whole shares to sell fractional shares to customers purposely. High-priced stocks like Amazon (AMZN) or Alphabet (the parent company of Google) frequently have their shares divided in this way (GOOGL).

In March 2020, AMZN and GOOGL were trading at more than $1,800 per share and $1,100 per share, respectively. 12 Fractional shares may be the only way for individual investors to purchase stock in these companies.

· Fractional Stock Trading

The sale of fractional shares may take longer than expected if the stock is not in high demand. Fractional shares aren't something everyone wants to keep, mainly from stock splits. An investor could own two hundred twenty-five shares of XYZ stock, valued at $12 each.

They would have 33712 shares, each worth $8, following a three-for-two stock split. They'll have an easier time securing a fractional share of XYZ stock if there's a lot of interest in the stock. To bring their total shares to 338, they could find a brokerage firm that would sell them another half share for the same price.

How to Invest in Fractional Shares

Online brokerages such as Fidelity, Charles Schwab, and Robin Hood offer fractional shares for sale. Fractional shares can also be purchased through investing apps like Stash, Cash App Investing, and SoFi Invest.

You can buy fractional shares for your portfolio through some robo-advisors like Acorns and Betterment (but not all: Wealth front holds your money as cash until you have enough to buy whole shares). Depending on the brokerage, fractional stock can be purchased for as little as $1 or as much as $5.

Fractional shares aren't available for every store or ETF on an investment platform. Unlike Charles Schwab, which sells only fractional shares in the S&'P 500 firms, Stash provides investors with a selected selection of equities and exchange-traded funds.

Does It Pay To Own a Small Percentage of a Company in Fractional Shares?

Is it worth investing in fractional shares when you first learn about them? Yes, that's correct. There's a common misconception that stock ownership is only beneficial if you own a total share, but that isn't the case.

Falcone emphasizes that investment returns are always relative. The stock price rises 10%, regardless of the number of shares you own, so you'll earn 10% on your investment regardless of how many shares you own.

In addition, fractional shares allow investors to diversify their holdings across a greater number of companies at a lower cost than if they owned the entire company.

How to Purchase a Fractional Share

Although the steps may vary slightly depending on your brokerage, the process of buying fractional shares follows the same general steps.

· Obtain an account

A brokerage business that accepts fractional shares is a good bet.

· Deposit cash

Opening an account with a brokerage can take as little as three business days, while with others, you must wait until your money has cleared before you can begin purchasing stock.

· Choose a stock

Buying fractional shares may be possible with some brokerage firms, but do keep in mind that you may only be able to do so for specific corporations.

· Decide How Much To Invest

Investing in shares or dollars is an option at some brokerages, while others only allow you to invest in specific numbers of shares. Fractional shares are used when you're supporting by dollar amount, while total shares are used when you choose the number of shares you want to buy.

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