Fractional shares

What Is Fractional Shares?

Fractional shares represent a portion of a single share of a company's stock or exchange-traded fund (ETF). Rather than requiring an investor to purchase a full, whole share, fractional shares allow individuals to invest a specific dollar amount, thereby owning a corresponding fraction of a share. This concept falls under the broader category of equity investing, democratizing access to high-priced securities and enabling greater diversification within a portfolio, even with limited capital. An investor holding fractional shares maintains a proportionate claim to any dividends or other corporate actions.

History and Origin

While the concept of owning less than a full share has long existed through mechanisms like dividend reinvestment plans (DRIPs) or stock splits, the widespread ability for individual investors to intentionally purchase fractional shares is a more recent development. Early offerings of fractional shares appeared around 1999 with platforms like BuyandHold, which allowed for small dollar-amount purchases. However, these early initiatives often involved subscription fees and did not gain broad traction.

The significant resurgence and popularization of fractional shares began in the late 2010s and early 2020s, largely driven by advancements in financial technology (fintech) and the rise of commission-free trading platforms³⁶,³⁵. Major online brokers started re-introducing fractional share trading, making it more accessible and user-friendly for retail investors. For instance, Fidelity launched its "Stocks By The Slice" program in early 2020, allowing purchases for as little as $1.00. This technological shift has removed traditional barriers to entry, enabling more individuals to participate in the market without needing substantial capital³⁴.

Key Takeaways

• Fractional shares allow investors to buy a portion of a single stock or ETF, rather than a full share, by specifying a dollar amount.
• They significantly lower the barrier to entry for expensive stocks, making investing more accessible to a broader range of individuals.
• Fractional shares facilitate portfolio diversification, as investors can spread smaller amounts across multiple companies and sectors.
• They are well-suited for investment strategies like dollar-cost averaging.
• Owners of fractional shares typically receive proportionate dividends but may lack certain shareholder rights, such as voting.

Interpreting Fractional Shares

Fractional shares are interpreted directly in proportion to their whole-share equivalent. If you own 0.5 of a share, you essentially own half of the company's equity that a full share represents. This means that any gains, losses, or dividend payments will be precisely half of what a full share would yield³³. The appeal lies in enabling investors to align their investment amounts precisely with their budget, rather than being constrained by the per-share price. For example, if a stock trades at $1,000 per share, an investor can choose to invest $100, thereby owning 0.1 fractional shares. This dollar-based investing approach provides significant investment flexibility and encourages consistent, regular contributions to a brokerage account.

Hypothetical Example

Imagine an investor, Sarah, who wants to invest in three different companies: Company A, trading at $50 per share; Company B, trading at $500 per share; and Company C, trading at $1,500 per share. Sarah has $1,000 to invest and wants to allocate it evenly across these three companies.

Without fractional shares, Sarah would face a challenge:

• Company A: She could buy 20 shares ($50 x 20 = $1,000).
• Company B: She could only buy 1 share ($500). She would have $500 leftover, unable to buy another full share.
• Company C: She could not buy any shares, as one share costs more than her total budget.

With fractional shares, Sarah can allocate her $1,000 precisely:

• She decides to invest $333.33 in each company.
• Company A: $333.33 / $50 per share = 6.6666 shares.
• Company B: $333.33 / $500 per share = 0.6666 shares.
• Company C: $333.33 / $1,500 per share = 0.2222 shares.

This allows Sarah to build a diversified portfolio across all three companies with her desired allocation, maximizing her investment potential from the outset.

Practical Applications

Fractional shares have transformed how many individuals engage with financial markets, particularly in retail investor segments.

• Accessibility to High-Priced Securities: Investors can buy a piece of expensive blue-chip stocks like Amazon or Google, which traditionally required a large capital outlay³²,³¹.
• Enhanced Diversification: With fractional shares, investors can allocate smaller sums across a wider array of companies and industries. This allows for more granular control over portfolio construction, even with a limited budget, and helps reduce unsystematic risk.
• Dollar-Based Investing: The ability to specify a dollar amount rather than a share quantity simplifies regular investing. This makes strategies such as dollar-cost averaging more effective and consistent, as an investor can commit a fixed amount weekly or monthly regardless of stock price fluctuations³⁰.
• Dividend Reinvestment: Fractional shares enable automatic and full reinvestment of dividends received, as even small dividend payments can be used to purchase additional fractions of shares, facilitating compounding returns²⁹.
• Financial Inclusion: Fractional shares contribute to greater financial inclusion by lowering the barrier to entry for a broader demographic. Research indicates that individual participation in financial market investment significantly expanded during the COVID-19 pandemic, with technology like app-based platforms offering fractional shares making investing more accessible²⁸,²⁷. Data from the Federal Reserve shows that equities now account for a substantial portion of total household assets, reflecting increased participation²⁶.

Limitations and Criticisms

Despite their advantages, fractional shares come with certain limitations and considerations:

• Liquidity and Transferability: Fractional shares may have reduced liquidity compared to whole shares²⁵. Not all brokerage firms offer fractional share trading, and transferring fractional shares between different brokers can be difficult or impossible, often requiring investors to sell their holdings first²⁴,²³. This can result in potential tax implications or delays in accessing funds²².
• Shareholder Rights: Investors holding fractional shares typically do not possess full shareholder rights, such as voting on corporate matters or attending shareholder meetings²¹,²⁰. While some platforms may aggregate votes from multiple fractional shareholders, direct voting power is generally absent¹⁹.
• Broker Dependence: Fractional shares exist within the specific brokerage account and are dependent on that broker's internal systems and policies¹⁸. This means varying rules regarding minimum investment amounts, available securities, and order execution methods across different platforms¹⁷. Some brokers execute fractional share orders in real-time, while others may aggregate orders throughout the day, which could impact the execution price¹⁶,¹⁵.
• Potential for Misleading Perception: While fractional shares lower the entry barrier, critics argue that they might create a "nominal price illusion," where investors focus on the low dollar amount invested rather than the underlying fundamentals or valuation of the company¹⁴. It is crucial for investors to remember that affordability does not equate to a sound investment¹³.

Fractional Shares vs. Stock Splits

While both fractional shares and stock splits result in a change in the number of shares an investor holds, their underlying mechanisms and purposes differ significantly.

Fractional Shares are created when a brokerage firm allows an investor to purchase a dollar amount of a stock that is less than the current price of one full share. The brokerage internally manages the ownership of partial shares, often by holding whole shares in its own name and then allocating fractions to its clients. This is a deliberate offering by the broker to increase accessibility.

A Stock Split, on the other hand, is a corporate action initiated by a company. It involves increasing the number of outstanding shares by dividing existing shares into multiple new shares. For example, in a 2-for-1 stock split, each existing share is replaced by two new shares, and the price per share is proportionally reduced. An investor who owned one share before the split would own two shares after, but the total value of their holding would remain the same. Stock splits are typically done to make a company's shares more affordable and liquid, appealing to a broader base of investors, but they do not inherently create fractional holdings unless a shareholder owns an odd number of shares that cannot be evenly divided by the split ratio (e.g., owning 1.5 shares after a 3-for-2 split)¹²,¹¹.

The key distinction is that fractional shares are a brokerage-level offering driven by investor demand for accessibility, whereas a stock split is a corporate decision affecting all outstanding shares.

FAQs

1. Can I receive dividends with fractional shares?

Yes, if you own fractional shares of a company that pays dividends, you are entitled to receive a proportionate amount of that dividend. For example, if you own 0.75 of a share and the dividend is $1.00 per full share, you would receive $0.75¹⁰,⁹. Many brokerages also allow for automatic dividend reinvestment, where these small dividend payments are used to purchase even more fractional shares.

2. Can I transfer fractional shares to another broker?

Generally, no. Most brokerage firms do not allow the direct transfer of fractional shares to another firm⁸,⁷. If you decide to move your brokerage account to a different provider, you typically have to sell your fractional shares first, which might trigger capital gains taxes or fees, and then repurchase them with the new broker.

3. Do I have voting rights with fractional shares?

In most cases, owners of fractional shares do not have voting rights for company matters⁶,⁵. While the brokerage firm holds the full shares on behalf of its clients, direct voting power is usually reserved for holders of whole shares. Some platforms might facilitate proxy voting for fractional shareholders, but this is not universal⁴.

4. Are fractional shares suitable for beginners?

Fractional shares are often considered very suitable for beginners due to their low barrier to entry. They allow new investors to start investing with small amounts of capital and build a diversified portfolio without needing to save up large sums for expensive stocks³,². This can help new investors gain experience and gradually increase their investment amounts over time.

5. What types of orders can I place for fractional shares?

The types of order that can be placed for fractional shares depend on the brokerage firm. Many platforms allow for both market order and limit order for fractional share purchases. Some platforms also support dollar-based orders, where you specify the dollar amount you wish to invest rather than the number of shares¹,.