Investing

fractional share

What is a fractional share?

Shares of less than one full share are called fractional shares. Such shares may be the result of a stock split, dividend reinvestment plan (DRIP) or similar corporate action. Fractional shares are generally not available from the stock market, and while they are valuable to investors, they are also difficult to sell.

key takeaways

  • Fractional shares are part of a stock that is less than one full share.
  • Odds often come from stock splits, which don’t always result in an even number of shares.
  • A merger or acquisition creates fractional shares because the company consolidates new common shares using a predetermined ratio.
  • Capital gains, dollar cost averaging, and dividend reinvestment plans often leave investors with fractional shares.
  • Fractional shares are not traded on the open market; the only way to sell fractional shares is through a large brokerage firm.

Learn about fractional shares

Fractional shares come in a variety of ways, including dividend reinvestment plans, stock splits, mergers and acquisitions.

Dividend Reinvestment Plan

Dividend Reinvestment Plans (DRIPs) typically generate fractional shares. A dividend reinvestment plan is a plan in which a company or brokerage firm offering dividends allows investors to use dividend payments to buy more of the same shares. Since that amount “trickles” back to buy more shares, it’s not limited to whole shares. Reinvested capital gains distributions and dollar cost-averaging programs may also lead to the purchase of fractional shares.

stock split

Stock splits don’t always result in an even number of shares. A 3-for-2 stock split will create three shares for every two shares an investor owns, so investors who hold an odd number of shares will end up with zero shares after the split. Three strands will become 4½, five strands will become 7½, and so on.

M&A

Mergers and acquisitions (M&A) may also result in fractional shares, as companies consolidate new common shares using a predetermined ratio. This ratio usually results in fractional shares of shareholders.

Some brokerage firms will deliberately split their entire shares in order to sell fractional shares to clients. This type of stock split is most common in high-priced stocks like Amazon (AMZN) or Google parent Alphabet (GOOGL). As of March 2020, AMZN is selling for more than $1,800 per share, while GOOGL is selling for more than $1,100 per share.BeFractional shares are often the only way for individual investors to buy shares
such a company.

For example, a young investor with limited funds may be obsessed with buying shares in Amazon. Investing from $1,000, they don’t have enough money to buy the entire stock, so they may find a brokerage firm that is willing to sell some of the stock. They could invest half of their money in a third of Amazon and the other half in penny stocks, allowing them to buy the entire stake.

In the case of stock splits, mergers and acquisitions, shareholders sometimes have the option of substituting cash for fractional shares. Income received is taxable.

trading fractional shares

The only way to sell fractional shares is through a large brokerage firm, which can sell them along with other fractional shares until the entire share is obtained. Selling fractional shares may take longer than expected if the market for selling shares is not in high demand.

Not everyone wants to own fractional shares, especially if they end up holding fractional shares for unintentional reasons like stock splits. An investor might own 225 shares of XYZ stock at $12 per share. After a 2-for-3 split, they would end up with 337½ shares at $8 per share. If there is a lot of demand for XYZ stock in the market, they will be more likely to find a brokerage firm that is willing to accept some shares. Or they could find a brokerage firm willing to sell another half, bringing their total to 338 shares.

Real Example of Fractional Shares

In November 2019, Interactive Brokers became the first major online broker to offer fractional stock trading.On January 29, 2020, Fidelity announced that it will offer fractional share trading in stocks and ETFs.

Related Posts

1 of 2,105

Leave A Reply

Your email address will not be published.