How Do Fractional Shares Work? A Complete Beginner’s Guide[2024]

More and more often, big-name stocks come with big price tags. As of September 2021, one share of Tesla Inc. (TSLA) was priced at nearly $270.

Fractional shares let you buy the priciest stocks and exchange-traded funds (ETFs) for as little as one dollar. Buying fractional stock is a boon to new investors, and can help you diversify a smaller portfolio by investing in companies that otherwise might be out of reach.

KEY TAKEAWAYS

• A fractional share is a portion of an equity stock that is less than one full share.
• Fractional shares often result from stock splits, which don’t always result in an even number of shares.
• Mergers or acquisitions create fractional shares, as companies combine new common stock using a predetermined ratio.
• Capital gains, dollar-cost averaging, and dividend reinvestment plans often leave the investor with fractional shares.
• Fractional shares don’t trade on the open market; the only way to sell fractional shares is through a major brokerage.

What Are Fractional Shares?

As their name suggests, fractional shares are portions, slivers, or slices of stocks and ETFs that are smaller than a whole share.

You could purchase fractional shares for any number of reasons: You might not have enough money to buy a full share of a stock, or you might want to invest a set dollar amount in a stock or ETF every month—say $100—rather than try to buy a round number of shares that have a fluctuating stock price, costing say $90 one month and $150 the next.

Fractional shares are a relatively new development in investing—only a few years ago it was almost impossible to buy less than single shares of stocks and ETFs. Mutual funds have long supported fractional share investing, but until recently you could only own fractions of shares in a few limited ways:

• Stock splits or reverse stock splits. When a company splits its stock, it boosts its share count by giving shareholders additional shares of stock. In a 3:2 stock split, for example, you receive three shares for every two shares you own. So if you owned 15 shares, you would now have 22 ½ shares. That extra half stock is a fractional share. In a 3:2 reverse stock split, you’d end up with two shares for every three you own.
• Dividend reinvestment plan (DRIP). With a DRIP, dividends paid out by a company or fund are automatically used to purchase new shares. When this happens, investors can end up with fractional stock. Let’s say you owned 200 shares of a company and the annual dividend payout was $0.30 per share. You’d be entitled to dividends worth $60 this year. If the stock is priced at $40, the dividends would automatically buy one and a half shares. You’d end up owning 201 ½ shares of stock.
• Mergers and acquisitions. When companies merge or are acquired, their stock may be exchanged for new shares. They generally use a ratio to combine stocks from different companies, meaning five shares of Company A might become three share of Company B. This process could result in fractional shares.

How Do They Work?

• Purchasing: You specify the dollar amount you want to invest, and your brokerage will calculate the fractional share equivalent based on the current stock price.  
• Ownership: You own a proportional part of the company and are entitled to a proportional share of dividends and capital gains.  
• Value: The value of your fractional share fluctuates with the stock price.  
• Trading: While some brokerages allow trading of fractional shares, it’s often easier to sell the entire position when you want to liquidate.

Why are fractional shares important?

Fractional shares are important because they eliminate two major pain points for investors, especially newer investors or people who typically invest relatively small amounts of money at a time.

First, it allows investors to put all of their money to work at once. As an example, let’s say that you put $500 into your brokerage account and you want to invest in Berkshire Hathaway (BRK.A -3.33%)(BRK.B -3.42%), which trades for approximately $364 per share as of August 2023.

If your broker doesn’t allow fractional share trading, you would only be able to buy one share, and the additional $136 would remain in your brokerage account. On the other hand, fractional share trading would allow you to use your entire $500 deposit to buy about 1.37 shares of Berkshire Hathaway stock.

Second, it allows investors with relatively small amounts of investable cash to buy whatever stock they want. As an example, MercadoLibre (MELI -0.01%) trades for about $1,300 per share as of this writing. Unless you have that much cash available, you can’t afford to buy any shares if your broker doesn’t allow fractional shares. However, if they do allow fractional share investing, you could add MercadoLibre shares to your portfolio for as little as a few dollars.

How do stock splits work?

High profile companies such as Amazon, Alphabet, Apple and Tesla have carried out stock splits in the last few years after share prices soared in the bull run in technology shares. Stock splits can help to widen the shareholder base by making shares more accessible to smaller investors.

In a stock split, shareholders are given a certain number of shares for every share they currently own. In Amazon’s last 20:1 stock split, shareholders were given one share for every 20 Amazon shares they owed. This reduced its share price from more than $2,000 before the split to $120 afterwards.

Benefits of Fractional Shares

• Start investing with smaller amounts of money. If you’re just starting out and don’t have a large balance of money to invest, fractional shares can make a big difference. They let you get into the market immediately and start benefiting from compounding returns sooner.
• Diversify your portfolio with less money. One of the basic rules of portfolio construction is diversification. By owning a variety of different stocks and especially ETFs, you can reduce the likelihood that you lose money if any one stock tanks. Because fractional investing lets you buy many shares for $1 to $5, you may be able to buy broader selections of stocks than you could otherwise.
• Better dollar cost averaging options. With dollar cost averaging, you invest a set amount of money regularly. Over time, this may let you pay less per share than you would if you bought all of your shares at once. Because dollar cost averaging is focused on a consistent dollar amount, not a consistent share amount, it works better when you’re able to invest that full amount. Otherwise, some of your money has to sit in a cash account before you have enough to buy a full share.

Downsides of Fractional Shares

• Limited selection of stocks: Not every stock is available for fractional investing. You might not be able to choose from as many companies as you could if you bought whole shares.
• Liquidity: You might not have immediate asset liquidity with your fractional shares. Fractional shares may not trade as frequently or as rapidly as whole shares. Brokers wait to accumulate enough fractional orders to buy whole shares, which may reduce the speed of filling orders. Also, not every fractional share is in high demand, so it can sometimes take longer to buy or sell your fractional shares.
• Shareholder rights: Depending on your broker, you may not be able to exercise voting rights on company matters if you own less than a whole share. Robinhood, for example, adds up fractional shares into whole shares to report votes to companies. Stash, on the other hand, doesn’t let you vote on company issues until you have at least one share of a company.
• Transfers: Some brokers won’t let you transfer fractional shares to other brokers. Instead, they transfer any full shares and sell any fractional shares to give you as cash. This may be merely an inconvenience, as you may be able to repurchase shares quickly at your new brokerage. That said, liquidating fractional shares may have unintended tax consequences if your fractional shares have increased in value.
• Dividends: Just as fractional stocks represent a portion of a full share, if you own fractional shares, you’ll get the portions of stocks’ dividends. So, if a payout is $0.50 per share, and you have half of a share, you’ll receive $0.25 as a payout.

Before purchasing fractional shares, make sure you understand your brokerage’s fractional share policies and fully understand the pros and cons of buying portions of shares.

How can investors buy fractional shares?

Some, but not all, trading platforms allow individuals to buy and hold fractional shares. As a general rule, fractional shares are more typically offered by the zero-commission platforms, such as eToro, instead of the more traditional platform providers from a stockbroking background.

As with normal shares, fractional shares are bought and sold ‘live’. Individuals will need to log onto their trading platform and enter the company name or ticker to receive a live quote, which they can then accept or decline. The minimum investment is usually between £1 and £10.

We’ve compared key features, including fees and the option of holding fractional shares, in our pick of the best trading platforms. Trading fees can be particularly important for fractional shares, as they can represent a significant chunk of the transaction value for smaller investments.

Can investors hold fractional shares in an ISA?

During the course of 2023, much debate has surrounded fractional shares and the legalities surrounding whether they can be held in a tax-efficient Individual Savings Account (ISA). 

Tax treatment depends on one’s individual circumstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.

The key issue has been whether fractional shares count as qualifying shares under HMRC rules, which neither explicitly includes, nor excludes, fractional shares. The official line from HMRC to date has been that it wasn’t permissible to hold fractional shares in an ISA.

However, in the government’s November 2023 Autumn Statement, Jeremy Hunt, the Chancellor of the Exchequer, revealed his intention to permit the holding of fractional shares in an ISA.

Rachel Winter, a partner at Killik & Co, said the move would allow more investors to buy into some of the biggest companies and build themselves more diversified portfolios.

She said: “The Autumn Statement showed that the government intends to permit the purchase of fractional shares in ISAs.

“While no detail has been given as to when and how this might happen, it is nonetheless encouraging, particularly for those who wish to buy US shares. Ideally, those looking to purchase individual shares should look to limit their risk level by spreading their money across a diversified range of different companies.

“This is currently difficult in practice because some shares are so highly priced. NVIDIA, for example, has been the best performing stock in the S&P 500 this year, and a single shares costs $500. This puts it out of reach for those without large sums available to invest. But fractional shares would allow more individuals to purchase shares in exciting companies such as this.”

Win for ordinary investors

Adam Dodds, ceo of Freetrade, said: “This is a victory for ordinary investors throughout the UK. Fractional shares enable customers with small and large portfolios to diversify their holdings much more easily than if they were only limited to holding whole shares.

“We’re pleased that the government has stood up for ordinary investors and acknowledged there is a need to update decades old ISA regulations that have simply not evolved with the market.”

Dan Moczulski, UK managing director of eToro, said: “The government has undoubtedly made the right decision in opening the door to fractional shares in ISAs. We are strong advocates of fractional shares and believe that not only do they reduce the barriers to investing, but allow people to get the exact exposure to a stock that they want, rather than having to invest what seems like an arbitrary amount based on share price.

“Crucially, fractional shares in ISAs also give people the freedom to withdraw the exact amount of money that they want from an ISA, rather than having to take out too small an amount, or too much, because they are limited to investing only in share price denominations.”

Which companies have the highest share prices?

Investors are most likely to buy fractional shares where the company has a particularly high share price, so let’s take a look at the companies with some of the highest share prices:

Top of the list by some margin is Berkshire Hathaway, with Warren Buffett’s investment company costing investors a staggering £422,000 per share.

With the exception of Swiss chocolatier Lindt & Sprüngli, all of the companies on the list are quoted on US stock markets. As a result, platforms offering fractional shares tend to offer US, rather than UK or European, shares.

Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

How to Buy Fractional Shares

Many online brokerage platforms sell fractional shares, including Fidelity, Charles Schwab and Robinhood. Investing apps such as Stash, Cash App Investing and SoFi Invest also offer fractional shares. A few robo-advisors, like Acorns and Betterment, purchase fractional shares for your portfolio (but not all: Wealthfront¹ holds your money as cash until you have enough to buy whole shares).

Depending on the brokerage, you might need to buy at least $1 or up to $5 worth of fractional stock. In addition, not all stocks or ETFs offered for sale on an investing platform are available as fractional shares. Charles Schwab, for example, only sells fractional shares of companies in the S&P 500, while Stash offers a curated list of stocks and ETFs.

If you want to buy fractional shares, compare online brokerages and investing apps before you sign up to ensure the one you choose allows it. Also, take a look at the list of stocks or ETFs available as fractional shares.

Finally, make sure there aren’t additional commissions or fees for fractional share investing. Since fractional share buys are usually made in smaller dollar amounts, fees could drastically eat into your returns.

Disclaimer ||

The Information provided on this website article does not constitute investment advice ,financial advice,trading advice,or any other sort of advice and you should not treat any of the website’s content as such.

Always do your own research! DYOR NFA

Coin Data Cap does not recommend that any cryptocurrency should be bought, sold or held by you, Do Conduct your own due diligence and consult your financial adviser before making any investment decisions!