Fractional shares are gaining popularity among investors as they allow buying a portion or fraction of one share instead of purchasing the entire share. This investment option is particularly appealing for those looking to diversify their portfolios or invest in high-priced stocks with smaller amounts.
What are fractional shares?
A fractional share allows you to invest in a portion (or a fraction) of a stock instead of buying an entire stock. For example, one unit of a US stock’s current value is $100. You don’t want to invest that large an amount. Therefore, Fractional investing enables you to buy a small portion of this $100 stock. Let's say you are willing to invest $10 for this stock, you will therefore be able to buy 10% of this stock. 10% of $100 = $10. This way you would have invested in 1/10th of this US stock. This is therefore the concept of fractional investing wherein you can own a small percentage of the stock.
How do fractional shares come about?
Fractional shares are created when brokerage firms offer investors the option to purchase a portion of a full share, rather than needing to buy the entire share. When you choose to invest in a fraction of a stock, the broker holds the full share in their system, while internally recording you as the owner of the fractional part.
For example, if you buy 0.1 shares of a company’s stock, the brokerage firm still owns the full share, but you are recorded as owning 10% of it. Think of this arrangement like a ride-sharing service: you don’t have to own the entire vehicle to get to your destination. Similarly, with fractional shares, you don’t have to buy the entire stock to benefit from its growth. The broker essentially ‘drives the car,’ while you pay only for your part of the journey.
As a fractional owner, you’re entitled to dividends in proportion to your ownership. So, if the company declares a dividend, you receive an amount that matches your fraction. For instance, owning 0.1 shares of a stock means you would receive 10% of the total dividend paid on each full share.
How to Buy and Sell Fractional Shares?
When you choose a US Stock to invest in, simply enter the amount you want to invest. For example, enter $10 if that’s the amount you want to invest, regardless of the price of a whole share. Once purchased, you can simply track and monitor your shares just like any other stock in your portfolio.
Selling a fractional share works the exact same way.
Benefits and Drawbacks of Fractional Shares
| Advantages | Disadvantages | |
| Affordability | Allows investors to start with small amounts, making high-priced stocks accessible. | Limited selection of stocks, as not all stocks are available as fractional shares on every platform. |
| Portfolio Diversification | Enables spreading investments across multiple companies with less capital. | Liquidity can be an issue if fractional shares aren’t traded frequently or rapidly. |
| Flexibility | Offers the flexibility to invest a fixed amount without needing to match the entire share price. | Limited voting rights may be available for fractional shareholders on some platforms. |
How Fractional Shares Can Help You Diversify
Investing in fractional shares is a cost-effective way to diversify your portfolio. By allowing smaller investments, fractional shares provide an opportunity to invest in a broader selection of stocks without needing significant capital. For example, you could invest $50 each in Apple, Amazon, and Tesla rather than spending all $150 on a single company. This spreads your risk and increases exposure to different sectors.
FAQs
Can I buy fractional shares for all companies listed on US stock exchanges?
Not all companies offer fractional shares. Some platforms limit fractional investing to popular or high-value stocks in major indices like the S&P 500. It's best to check each platform’s offerings.
Is there a minimum amount to invest in fractional shares?
Many platforms, such as INDmoney or Robinhood, have minimum purchase requirements for fractional shares, usually starting as low as $1 to $5.
How are dividends paid on fractional shares?
Dividends on fractional shares are paid proportionately. If a stock pays $1 per share and you own half a share, you will receive $0.50 as a dividend.
What happens to fractional shares during a stock split?
If a company announces a stock split, fractional shares are adjusted proportionally. For instance, if a company performs a 2-for-1 stock split, your fractional holdings will double, maintaining the same total value.
Can I transfer my fractional shares to another brokerage?
Yes you can transfer fractional shares between various US brokers.