A fractional share refers to equity ownership that is less than one full share. Fractional shares can result from various corporate actions such as stock splits, mergers, or acquisitions.
What Are Fractional Shares?
Fractional shares are portions of a full share of a company’s stock. Unlike traditional shares, which are bought and sold in whole share increments, fractional shares allow investors to buy a fraction of a share. This is particularly useful for investing in high-priced stocks that might otherwise be unaffordable.
Stock Splits
Stock splits occur when a company divides its existing shares into multiple shares. For example, in a 3-for-2 stock split, shareholders receive three shares for every two they own. If a shareholder owns an odd number of shares, they might end up with a fractional share post-split.
Mergers and Acquisitions
During mergers or acquisitions, fractional shares can arise when shareholders receive a new company’s shares calculated based on a specific exchange ratio. This exchange might not always result in a whole number of shares, leading to fractional ownership.
Examples of Fractional Shares
Example 1: Stock Splits
Imagine Company A decides on a 3-for-2 stock split. An investor with 5 shares will receive 7.5 shares (5 x 3/2), resulting in 7 full shares plus 0.5 fractional shares.
Example 2: Dollar-Based Investing
Some brokerage platforms allow investors to purchase stock with a fixed dollar amount rather than purchasing whole shares. For instance, if an individual invests $50 in a company whose stock is priced at $300 per share, they would own $\frac{50}{300}$ or 0.167 fractional shares.
How to Buy and Sell Fractional Shares
Purchasing Fractional Shares
Investors can purchase fractional shares through:
- Online brokerages that offer fractional investing (e.g., Robinhood, Schwab).
- Dividend Reinvestment Plans (DRIPs) where dividends are automatically reinvested into purchasing more shares, including fractional amounts.
- Direct Stock Purchase Plans (DSPPs) which allow investors to buy shares directly from the company in fractional increments.
Selling Fractional Shares
Selling fractional shares is usually straightforward, as most online brokerage platforms support fractional share transactions. Investors can specify dollar amounts or fractions of shares they wish to sell.
Special Considerations
Liquidity and Market Orders
While fractional shares offer flexibility, executing market orders might lead to variations in prices since fractional shares are subject to the same market conditions as whole shares.
Dividends
Dividends on fractional shares are paid proportionally to the fraction of the share owned. For instance, if a company pays a dividend of $2 per share and an investor owns 0.5 shares, they would receive $1 in dividends.
Voting Rights
Fractional shares may or may not carry voting rights, depending on the issuing company’s policies. It is important to verify this with the individual company or brokerage firm.
FAQs
Can Fractional Shares be Transferred or Gifted?
Are There Fees Associated with Fractional Shares?
Related Terms
- Stock Split: An action that increases the number of shares while decreasing the share price proportionately.
- Dividend Reinvestment Plans (DRIPs): Programs where dividends are automatically reinvested into additional shares.
- Direct Stock Purchase Plans (DSPPs): Plans that allow investors to purchase stocks directly from a company.
- Equity: Ownership interest in a company, represented by shares.
Summary
Fractional shares democratize investing by allowing investors to buy portions of high-priced stocks, making it easier to diversify portfolios without a significant capital outlay. Understanding the mechanics and potential benefits, along with awareness of the special considerations, is crucial for anyone looking to leverage fractional investing.
References
- “Understanding Stock Splits,” Investopedia.
- “Dividend Reinvestment Plans (DRIPs),” The Balance.
- “How to Buy Fractional Shares,” NerdWallet.
Through this comprehensive entry, we hope to not only clarify what fractional shares are but also empower investors with the knowledge to engage effectively in fractional share investing.
