Definition
A fractional share is a portion of a stock that is less than one full share. It usually results from stock splits, dividend reinvestment plans (DRIPs), or similar corporate actions. Individual investors can also buy fractional shares in some cases, often through dividend reinvestment or certain investment platforms.
Key Takeaways
- A fractional share is a unit of a stock that is less than one full share, typically obtained through stock splits, dividend reinvestment plans, or certain investment management apps.
- Investing in fractional shares allows investors with limited capital to diversify their portfolio by purchasing portions of high-value stocks they’d otherwise be unable to afford.
- However, investors should be aware not all brokers offer fractional shares for trading, and liquidity can be a concern as fractional shares cannot usually be transferred between brokers.
Importance
A fractional share is significant in the financial world as it allows for more financial inclusivity and investment flexibility. Instead of needing to purchase an entire share, individuals can buy a fraction of a share in various companies, particularly those with high share prices.
This means that investing becomes accessible to a wider array of investors, not just those with substantial capital. Additionally, fractional shares enable a more diversified portfolio, since investors can spread their investment across multiple companies rather than potentially putting all their funds into one or two whole shares.
In stock splits or dividend reinvestment plans too, the concept of fractional shares plays an essential part. Hence, the importance of fractional shares lies in greater accessibility, diversification potential, and smoother financial operations.
Explanation
Fractional shares serve a significant role in making investing more accessible to a broader range of individuals who may be interested in purchasing stocks or other investment assets, but do not have the funds to buy a whole share. Not all stocks are affordable to the average investor, considering the prices of shares of some companies like Amazon or Google, which can cost thousands of dollars per share.
However, fractional shares make it possible for investors to purchase a portion of a single share for as little as a few dollars. This advancement in the investment world essentially democratizes access to wealth-building opportunities, allowing for diversified portfolios even amongst those investors with limited capital.
A person with only $500 to invest, for instance, can spread their investment across various high-priced stocks using fractional shares instead of having to choose one or two low-priced ones. This practice also enables regular and systematic investment, as investors can keep buying fractions on a routine basis, leading to the accumulation of a significant investment over time.
Fractional shares therefore allow for more flexibility, affordability, and potential for diversification in investment strategies.
Examples of Fractional Share
Stock Splits: A common use of fractional shares is seen when a company decides to split its stock. For example, when Apple, in 2020, had a 4-for-1 stock split, shareholders with an odd number of shares ended up having fractional shares post-split. For instance, if you owned 3 shares before the split, you would ideally have 12 shares after the split, but since this cannot be evenly divided, you would end up with 11 whole shares and one fractional share.
Dividend Reinvestment Plans (DRIP): Many publicly traded companies and mutual funds offer dividend reinvestment plans where the dividends paid out by the shares are used to purchase more shares of the company’s stock. Often, these dividends are not enough to purchase a full share, so a fractional share is purchased instead. For instance, if a company’s shares are priced at $100 and it pays you a $25 dividend, you could use this to buy a
25 fractional share.
Investment Apps: Many investment apps, such as Robinhood or Stash, allow investors to buy a fraction of a company’s stock. This is particularly useful for high-priced stocks like Amazon or Google, which may be out of reach for smaller investors. For example, if an investor has $500 to invest and a single share of Amazon’s stock cost $2,000, the investor could still invest in Amazon by purchasing a
25 fractional share.
FAQs on Fractional Share
What is a fractional share?
A fractional share is less than one full share of a company. Fractional shares can be obtained through dividend reinvestment programs, stock splits or other corporate actions. They allow investors to buy stocks in companies that they wouldn’t be able to afford otherwise.
How does fractional share investing work?
Fractional share investing works by providing investors with the ability to purchase less than one full share of a company. This can be especially beneficial for those who want to invest in companies with high per-share prices. Instead of needing the full price to invest, they can buy a portion of a share at a time.
Can I sell a fractional share?
Yes, you can sell fractional shares. However, the process may be different from how you sell regular shares. Some brokerages may not allow the selling of fractional shares, while others may offer the option to either sell or convert into a regular share if possible.
Do fractional shares pay dividends?
Yes, fractional shares do pay dividends. The amount of the dividend will be proportional to the fraction of the share you own. For instance, if you own 0.5 shares and the company pays a $1 dividend, you would receive $0.50.
What’s the benefit of buying fractional shares?
The primary benefit of buying fractional shares is the ability to invest in a company without needing to purchase a full share. This can make pricier stocks more accessible to investors with limited funds. It also allows for more precise investing and diversification of portfolio.
Related Entrepreneurship Terms
- Dividend Reinvestment Plan (DRIP): A program offered by a corporation that allows investors to reinvest their cash dividends by purchasing additional shares or fractional shares on the dividend payment date.
- Equity share: A company’s equity is divided into a number of equal parts. Owners of such shares are typically entitled to a dividend, which may result in the receipt of a fractional share depending on the amount invested.
- Stock Split: A corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares. This may result in fractional shares if the split ratio is not a whole number.
- Consolidation or Reverse Stock Split: This is the opposite of a stock split. A company reduces its number of outstanding shares, which could potentially result in fractional shares for investors who held an odd number of shares.
- Round Lot: A standard number of units of an asset – for example, 100 shares of stock. Investors with less than a round lot may own fractional shares.
Sources for More Information
- Investopedia: This is a comprehensive financial website that containts detailed explanations of many financial terms, including fractional shares.
- The Balance: This is a personal finance website that covers various aspects of financial planning, including investing in fractional shares.
- The Motley Fool: This website provides investment advice and financial news. It has articles and resources on fractional shares and how to invest in them.
- MarketWatch: This website provides stock market data and analysis, including educational resources about fractional shares.
