What Are Fractional Shares? Explanation, Uses, and Examples

In the ever-evolving world of finance, understanding the nuances of investing is key to building a solid financial portfolio. One aspect that many investors encounter is fractional shares – a concept that often arises from stock market activities. In this article, we will explore the world of fractional shares, discussing what they are, how they come into existence, and their significance in the world of investments.

Fractional shares are born out of various financial events, with dividend reinvestment plans being a common source. A dividend reinvestment plan (DRIP) allows investors to utilize their dividend payouts to purchase more shares, including fractional ones. As these reinvested dividends accumulate, they can be used to acquire fractional shares, breaking the traditional notion of whole shares.

Stock splits are another event that can lead to fractional shares. These splits don’t always result in even numbers of shares. For example, a 3-for-2 stock split would provide three shares for every two shares owned, resulting in fractional shares. Investors may find themselves with fractions like 4.5 shares, 7.5 shares, and so on.

Mergers and acquisitions (M&As) may also create fractional shares when companies merge using a predetermined ratio. Shareholders of both companies may end up with fractional shares as a result of this process.

Some brokerage firms intentionally split whole shares to offer fractional shares to their clients. This is particularly common with high-priced stocks like Amazon or Alphabet. Fractional shares enable individual investors with limited funds to invest in such companies. For instance, a young investor might want to buy Amazon shares with $1,000, but this amount isn’t sufficient to buy a full share. In such cases, brokerage firms can sell fractional shares, allowing investors to own a part of these high-value stocks.

Selling fractional shares can be more complex than selling whole shares, as they don’t trade on the open market. The only way to sell fractional shares is through a major brokerage firm, which can aggregate them until they form a whole share.

The time it takes to sell fractional shares can vary, depending on the demand for the stock in the market. High-demand stocks are more likely to find buyers for fractional shares. For instance, if an investor has 337.5 shares of XYZ stock after a stock split, they might find a brokerage willing to purchase the fractional share if there’s high demand for XYZ stock. Alternatively, they can seek a brokerage that will sell them another half share to round up to 338 full shares.

In November 2019, Interactive Brokers made history by becoming the first major online broker to offer fractional shares trading. Shortly after, in January 2020, Fidelity followed suit, announcing its intention to offer fractional shares trading in equities and ETFs. These developments highlighted the growing popularity and demand for fractional share trading among investors.

Owning fractional shares allows investors to access high-value stocks, diversify their portfolios, and reinvest dividends, all while working with limited funds.

Yes, some brokerage firms may charge fees for handling fractional shares. Investors should review the fee structure of their chosen brokerage.

Yes, many brokerage firms allow investors to hold fractional shares in retirement accounts, making them a convenient option for retirement planning.