Fractional Share

Definition

A fractional share is a unit of stock that amounts to less than one full share. It commonly comes about due to stock splits, dividend reinvestment plans, or similar corporate actions. Investors can also buy fractional shares intentionally, which is increasingly popular as it allows investment in high-priced stocks with a small amount of money.

Phonetic

The phonetic pronunciation of “Fractional Share” is: /ˈfrækʃənl ʃɛər/

Key Takeaways

1. Accessibility: Fractional shares enable individuals to buy stocks that they may not otherwise afford. As a result, investors can still make investments in high-value companies with the limited funds. This kind of investment democratizes the stock market, making it more accessible to small-scale investors.

2. Diversification: Because you’re not required to purchase a whole share, investing in fractional shares allows for greater diversification. Even if you have limited funds, you can invest in a variety of stocks which helps in spreading out investment risks.

3. Automatic Investing: Fractional shares allow for automatic investment strategies, such as dollar-cost averaging, where you can regularly invest a fixed dollar amount regardless of the share price. This can often lead to a lower average cost per share over time.

Importance

Fractional shares are significant in business and finance because they allow for more flexibility and accessibility in investing, especially for small or beginner investors. Instead of purchasing a whole share of a company, which might be prohibitively expensive depending on the company, investors can buy fractions of a share for a price that their budget can accommodate. This concept also enables automatic dividend reinvestment and stock splits, allowing for the more efficient use of capital as it allows every cent to be invested. Therefore, ownership of fractional shares can lead to increased participation in the stock market, promoting diversification and potentially enhancing portfolio growth over time.

Explanation

Fractional shares have gained prominence as they open up a platform for individuals who may not have a considerable amount of money to invest in high-cost stocks, allowing for a broader participation in the market. Essentially, fractional shares enable investors to purchase stocks that are priced significantly higher than what they can afford with their available capital. For example, if an investor has $100 to invest and a single share of a company is priced at $500, through fractional shares, the investor could still purchase 0.2 shares of that company. The purpose here is to remove barriers to entry for smaller investors, allowing for increased diversification and opportunity in an investor’s portfolio.In the day-to-day operations of investment firms, fractional shares can be used in various situations apart from individual investing. They often come into play in dividend reinvestment plans (DRIPs) and stock splits. For instance, if an investor is enrolled in a company’s DRIP and the dividend payout isn’t enough to purchase a full share, the money is used to acquire a fractional share. Through this, every bit of an investor’s capital is put to work. Furthermore, stock splits may also result in fractional shares if a company decides to divide its shares in a way that doesn’t result in whole numbers. Altogether, fractional shares simplify investing and help investors maximize the efficiency of their capital usage.

Examples

1. Stock Splits: Companies often perform stock splits to lower the trading price of their stock to make it more attractive to retail investors. For instance, if a company that you own 100 shares of performs a 3-for-1 stock split, you will end up with 300 shares, each worth 1/3 of the pre-split price. In some cases, if the number does not split evenly, you can end up with fractional shares.2. Dividend Reinvestment Plans (DRIPs): A company might offer its shareholders a Dividend Reinvestment Plan. For instance, if a company gives a $50 dividend to an investor who owns 30 shares and the share price is $20, instead of receiving a cash payout, the investor may choose to receive 2.5 shares (an example of a fractional share) that gets added to his or her total share count.3. Share Purchasing via Investment Interfaces: Many modern online investment platforms such as Robinhood or Stash allow investors to buy fractional shares with a minimal amount of investment, which can be lower than the actual share price. For instance, even if one share of a company costs $1,000, these platforms allow you to invest as little as $1, enabling you to own a fraction of that share. This is seen as a way to democratize investing, opening up the market to those who may not have been able to afford whole shares of certain stocks previously.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Stock Split
• Dividend Reinvestment Plan (DRIP)
• Equity Investing
• Brokerage Account
• Shareholder Rights

Sources for More Information

• Investopedia
• Money Under 30
• The Motley Fool
• Bankrate