What is a Fractional Share?

A fractional share is like a slice of a gem...

If a share in a company is like a gem, a fractional share is like a slice of that jewel. Not everybody wants (or can afford) an entire gem, but these jewels can be broken into smaller pieces.

Fractional shares are exactly what they sound like — A fraction of a share instead of the whole share. Because a fractional share is less than a whole share, it allows those interested in fractional share investing to buy in smaller dollar amounts. If you’re a beginner investor interested in a large company with high share value and cannot afford a whole share, you might approach a brokerage firm with the dollar amount you want to spend, and buy a fractional share that corresponds to that dollar amount. Not all brokerage firms offer this option.

Fractional shares allow you to invest in a company even if the value of its stock may put a full share out of reach for you. It also can potentially give you more flexibility, allowing you to diversify your portfolio, and reduce risk.

Fractional share investing can also help you if you’re partial to dollar-cost averaging. This is when you regularly put a fixed amount of money into an account — be it a 401(k), an HSA, or an investment account — over a period of time. Say you receive a paycheck every other week and elect to transfer $100 of it directly into your brokerage account. Maybe that $100 won’t buy an entire share of stock at a company you’re interested in, but it can buy smaller fractional shares in a diverse array of stocks over time. Not all brokerage firms offer this option.

Keep in mind diversification and automatic investing do not ensure a profit and do not protect against losses in declining markets.

Some brokerage firms allow you to buy fractional shares. Firms may execute fractional orders in different ways. One example may be that the firm will buy or sell whole shares of any given stock, and then track which client owns which fractional portion of each share.

However, buying fractional shares isn’t the only way to end up with them. Fractional shares are often the byproduct of financial maneuvers by companies, such as stock splits. For example, in a 3-for-2 stock split, an investor with an odd number of shares would end up with fractional shares — in that case, for example, 5 shares would become 7½.

Fractional shares can also come about as the result of a dividend reinvestment plan, where dividends are immediately put to work buying more stock — but perhaps a bit of leftover cash won’t be enough for a whole share. A successful company may choose to reward its investors with a share of its profits; this can come in the form of a dividend paid out once or several times a year, in an amount corresponding to the number of shares each investor holds. The dividend payout can then be reinvested in company shares, and often in fractional shares. A dividend reinvestment plan sets this transaction to occur regularly and automatically.

Mergers and acquisitions can also create fractional shares, as companies may combine a new common stock based on a predetermined ratio. This will create a certain number of new shares out of old shares in a method that is similar to a stock split. For example, if Company A buys out Company B, the two could decide together that investors will now receive half a share of Company A stock for every share of Company B stock they held. If you were an investor in Company B and owned 5 shares of its stock, you would now own 2½ shares of Company A stock.

A company may choose to reward its investors with a share of its profits; this can come in the form of a dividend paid out once or potentially several times a year, in an amount corresponding to the number of shares each investor holds. Just as owning shares of a company allows an investor to receive dividends, owning a fractional share allows an investor to receive a dividend, too –– just a corresponding fractional amount.

Just as you can buy fractional shares of a single stock, you can also buy fractional shares in some exchange traded funds (ETFs). Much like fractional shares in company stocks, fractional shares in ETFs can allow you to diversify your stock portfolio, thereby potentially reducing risk. Just as you can approach a broker or brokerage firm with an amount of money and use it to buy a fractional share of a stock, you can also use that money to buy a fractional share in some ETFs. When it comes to buying and selling, fractional shares in ETFs operate under the same principles: You’ll go through a brokerage firm at both ends of the deal, and the shares may have certain conditions or fees attached to them.

Fractional shares from reinvested dividends can be sold the same way an investor would sell fractional shares acquired by any other means. In most cases, as an investor you’ll work through a middleman (usually a brokerage firm) to sell fractional shares. The firm may take your fractional share and bundle it together with others until it has a whole share to sell, or it may resell your fractional share to someone else who wants it. Some companies may buy your fractional share directly, but only if you sell all of your shares in the company at once.

Some brokerage firms allow the buying and selling of fractional shares. Always do your own research and be aware of fees, and that all investments carry risk.