What is a Fractional Share?
While a share is a single unit of ownership of a company, a part of a single share is called a fractional share. In other words, a fractional share is a unit of stock that is less than one whole share. These shares usually emerge from stock splits, bonus shares, mergers and acquisitions or similar corporate steps. A fractional share is not traded in the open market but is sold through a big brokerage firm.
How is Fractional Share Created?
A fractional share is created in several different ways.
- Stock Splits: In this case, the top company officials increase the number of shares that are outstanding by issuing more shares to existing shareholders.
- Mergers and Acquisitions: In this scenario, high priced stocks are sold as fractional stocks as the only way for an individual investor to buy these shares.
- Dividend Reinvestment Plans: In this case, a company lets its investors use dividend payouts to purchase more of the same shares. Since the dividend may not be enough to buy a full share, it leads to the purchase of fractional shares.
Advantages of Fractional Shares
- Invest in expensive stocks with just a fraction of the share price.
- Despite limited funds, investors can spread their money across more companies creating a very diverse portfolio.
- Allows for putting small amounts of spare money to work instead of letting it sit idle.
- Helps new investors in building a portfolio without risking a large sum on a single stock.
Disclaimer: The information provided is for educational purposes only. Please seek expert advice before making investment decisions.