Some stock shares can be big-ticket items, going for hundreds or even thousands of dollars each. Problem is, not everyone who’d like to own those expensive stocks can pony up enough cash to purchase a single share.
The solution: stock shares can be broken down into fractional shares, allowing more investors to buy a piece of their favorite company. This guide will explain how fractional shares and why they’re important for investors to understand.
What are fractional shares?
In investment-speak, a “share” is a fraction of a company. A fractional share is a fraction of a share of stock.
Why do fractional shares exist?
More often than not, fractional shares are created after a company engages in a stock split or merges with another company.
A stock split may end up splitting an individual share if an investor owns an odd number of shares. If two companies merge, they may combine stocks with each other using a specific ratio that splits shares into fractions.
Do fractional shares pay dividends?
The actions of investors can also result in fractional shares. Reinvesting dividends in pursuing a dividend reinvestment plan can end up creating fractions of a share.
Just because fractional shares aren’t full shares doesn’t mean they function any differently than full shares as investment instruments. Fractional shares pay proportionate dividends, assuming the stock in question pays dividends at all. This means that if you own 50% of a share, you get 50% of the dividends that a full share pays.
Dividends are a portion of a company’s earnings that the entity can choose to provide to its investors, thereby giving each fractional owner a share of the company’s profits. Companies might pay dividends at least once a year in amounts that correspond to each investors’ ownership of stock shares. Investors can receive dividends in cash or in the form of more stock (called a “dividend reinvestment”).
While there’s always risk in the market—and investors should be aware of the amount of fees they’re paying, owning fractional shares of dividend-paying stocks can be a wise part of a solid investment strategy. Such investments can result in earning more in dividends than you could recoup from interest in a savings account.
Why should I buy fractional shares?
The central reason an investor may want to buy a fractional share is to gain the ability to invest in a company whose full shares are trading at a price that’s out of reach. Someone who can’t afford a single share of a given stock can still become a shareholder by purchasing a portion of a share. Buying fractional shares can be a meaningful way for beginner investors to dip a toe in the waters of the stock market.
Even if you’re able to afford a full share of the stock you want, buying fractional shares could be a smart decision. Buying portions of shares of multiple companies instead of a full share of a single company lets you diversify your portfolio, thereby reducing your risk.
You may also want to buy fractional shares if you practice dollar-cost averaging, which means you regularly invest a specific amount in a set of stocks without regard for how many shares that investment buys you.
The amount you invest each time — say $200 into your TFSA or your brokerage account — may not buy you a full stock share in each instance, but can buy you fractions of shares and thus allow you to keep investing in given companies incrementally over time.
How can I buy fractional shares?
Some investors end up with fractional shares due to the decisions taken by the companies they’ve invested in. While an individual can’t buy or sell a fractional share on the stock market, they can do so through a broker, including some online trading platforms.
Some brokerage firms are willing to bundle multiple shares together to create a full share, sell you a fraction of a share to create a full share for you, or sell fractional shares to new investors. Not every brokerage provides this option, and those that do may deal with them in their own particular ways.
A number of online trading platforms allow investors to purchase fractional shares, and even those that don’t sell them outright are likely to let them to reinvest their dividends into fractional shares.
