What exactly is a fractional share?
A fractional share refers to less than one complete share of stock. Claims can come via stock splits, dividend reinvestment programs (DRIPs), or other company activities. Fractional shares aren’t available on the stock market and are hard to trade, yet investors appreciate them.
Understanding Fractional Shares
Stock splits, dividend reinvestment schemes, mergers, and acquisitions create fractional shares.
Dividend Reinvestment Plans
Dividend reinvestment programs (DRIP) frequently generate fractional shares. In a dividend reinvestment plan, investors can utilize dividend distributions to buy new shares from a dividend-paying company or brokerage business. This sum “drips” back into the purchase of further claims, not only complete ones. Reinvesting capital gains in dividends and dollar-cost averaging can buy fractional shares.
Stock splits
Stock splits may not always produce an even number of shares. An investor with an odd number of shares would receive a fractional share following a 3-for-2 stock split. Three claims become 4½, five become 7½, and so forth.
A merger and acquisition
Company mergers and acquisitions (M&As) might result in fractional shares due to the fixed ratio of new common stock. The ratio sometimes gives stockholders fractional shares.
Brokerage firms may purposely divide shares to sell fractional shares. High-priced stocks like Amazon (AMZN) and Alphabet (GOOGL) usually divide shares. Amazon sold for over $1,800 per share in March 2020, and Google sold for over $1,100. Individual investors may only be able to acquire fractional shares in such firms.
A young individual with minimal cash may want Amazon shares. They won’t have enough money to buy a whole share of stock with $1,000, but they may discover a brokerage business that sells fractions. They may invest half the money in one-third of an Amazon share and the other half in lower-priced equities to purchase complete shares.
In stock splits, mergers, and acquisitions, shareholders may get cash instead of fractional shares. Received income is taxed.
Fractional Share Trading
One must sell fractional shares through a big brokerage company, which can combine them until a complete claim is obtained. If the selling stock isn’t popular, selling fractional shares may take longer.
Someone who accidentally got fractional shares from a stock split may not desire them. At $12 per share, an investor may own 225 XYZ shares. After a 3-for-2 stock split, they would have 337½ claims at $8 each. A brokerage company may take the fractional share if XYZ stock is in high demand. Perhaps a brokerage business would sell another half-share to bring their total to 338.
An Actual Fractional Share
By November 2019, Interactive Brokers had become the first principal online broker to provide fractional share trading. 3 On January 29, 2020, Fidelity introduced fractional share trading for stocks and ETFs.
Conclusion
- Equity stock fractions are fewer than one complete share.
- Stock splits don’t always produce even shares, resulting in fractional shares.
- Mergers and acquisitions produce fractional shares by combining new common stock at a predefined ratio.
- Investors typically receive fractional shares via capital gains, dollar-cost averaging, and dividend reinvestment.
- Only large brokerages sell fractional shares.
