What Are Fractional Shares?
Fractional shares allow investors to buy part of a share in a company rather than paying for one whole share upfront. This can be useful for investors who want to start with smaller amounts or invest fixed sums at regular intervals. However, fractional investing can also come with practical limitations.
In this article, we explain what fractional shares are, how they work, the main benefits and risks to consider, and how to buy them.
The information in this article is provided for educational purposes only and does not constitute financial advice. Consult a financial advisor before making investment decisions.
Table of Contents
What Are Fractional Shares?
Fractional shares, as the name suggests, are portions of full shares. Instead of buying one or more whole shares in a company, they allow investors to buy a fraction, such as 0.5, 0.25 or 0.1.
This means the amount invested does not have to match the full market price of one unit. For example, if a share is currently trading at $1,000, an investor could choose to invest $100 and buy 0.1 of a share (not accounting for any costs of trading).
How Do Fractional Shares Work?
Fractional shares work by allowing an investor to buy a portion of a share based on the amount they want to invest. Instead of entering an order for one or more whole shares, investors can usually enter either a fractional amount or the cash amount they want to invest.
For example, if one share costs $1,000 and an investor allocates $250, they would own 0.25 of a share, before accounting for any costs.
If dividends are paid, they are typically distributed in proportion to the fraction held. For example, if an investor owned half a share, they would typically receive half of the dividend per share. However, the exact treatment can vary depending on the broker in question.
Besides dividends, other features of fractional shares can also vary between providers. A broker may offer fractional investing on selected shares only, limit certain order types, restrict transfers to another provider or treat voting rights differently from whole-shareholdings.
Fractional Shares vs Whole Shares
Fractional shares facilitate investing in smaller increments than whole-share investing. Some of the differences are highlighted in the table below.
Fractional Shares: Benefits and Risks
Whilst fractional shares can make investing more flexible, they also have limitations which investors should be aware of.
Benefits of Fractional Shares
- Lower Starting Amounts: Fractional shares can make higher-priced stocks more accessible to beginners or those with less capital.
- More Flexible Allocation: Investors can choose how much money they want to allocate, rather than adjusting their investment around the price of a full share.
- Diversification: They can help investors with less capital diversify, rather than being limited by the price of whole shares.
- Dollar-Cost Averaging: Fractional shares can support regular fixed-amount investing, regardless of the price of one unit.
- Less Uninvested Cash: Investors can utilise leftover balances, rather than waiting until they have enough to buy a full share.
Risks and Limitations of Fractional Shares
- Limited Availability: Not every broker offers fractional shares, and those which do typically only offer them on selected stocks.
- Transfer Restrictions: Fractional shares can be harder to transfer between brokers. In some cases, the fractional part of a holding may need to be sold before a transfer can take place.
- Voting Rights May Vary: Fractional shareholders may have limited or no voting rights.
- Costs Still Apply: Commissions and other trading costs still affect potential returns and, where minimum fees are involved, may have a bigger percentage impact on smaller trades.
- Execution Can Differ: Fractional share orders may be handled differently from whole-share orders, depending on the platform. This can affect when and how an order is executed.
How to Buy Fractional Shares
To buy fractional shares, investors will need to register with a broker that offers access to them. Before doing so, it’s worth checking that the stocks you’re interested in buying are eligible for fractional investing.
Regardless of which broker you choose, the general process usually looks like this:
- Choose a broker that offers fractional shares.
- Complete the onboarding process and fund your investment account.
- Search for the stock you want to buy.
- Enter the amount you want to invest or the fraction of a share you want to buy.
- Place the order and monitor your holding.
Are Fractional Shares Worth It?
Whether or not fractional shares make sense depends largely on an investor’s goals and available capital.
They can be particularly useful for beginners, as well as those who want to buy higher-priced shares with a smaller outlay, diversify their holdings across multiple companies or invest fixed sums at regular intervals.
However, they may be less suitable for investors who prioritise full shareholder rights and access to a wider range of stocks. Furthermore, their usefulness may be limited for investors with access to a large amount of capital.
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Frequently Asked Questions
Do Fractional Shares Pay Dividends?
Yes, fractional shares pay dividends on dividend stocks. The payment is usually distributed in proportion to the fraction held. For example, if an investor held a quarter of a share, they would receive a quarter of the dividend payment.
How Do Stock Splits Work with Fractional Shares?
When a stock split occurs, fractional shares are typically adjusted in the same proportion as whole shares. For example, in a 2-for-1 stock split, an investor who held 0.5 of a share would hold 1 share after the split. However, the total value of the holding is not affected by the split itself; the investor owns more shares, but each share is worth a proportionally smaller amount after the split.
Can You Transfer Fractional Shares to Another Broker?
It may not be possible to transfer fractional shares between brokers. Many brokers require the fractional part of a shareholding to be sold before the remaining whole shares can be transferred.
Can You Sell Fractional Shares?
Yes, fractional shares can usually be sold through the platform where they are held.
Do Fractional Shares Have Voting Rights?
Some brokers support voting on fractional shareholdings, but others may offer limited or no voting rights.
Are Fractional Shares Taxed?
Tax treatment varies depending on an investor's country and their personal circumstances. In general, selling fractional shares for a profit or receiving dividends may be a taxable event; however, investors should do their own research or speak to a qualified tax professional where needed.
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