Fractional shares, also known as partial shares, are pieces of a single share of stock that can be bought and sold. They allow investors to purchase a smaller portion of a company’s stock rather than buying an entire share which can be expensive. This can be especially beneficial for those just starting out investing who need more money to put into the market.
So, what are fractional shares?
When a company issues stock, it divides a certain number of shares among investors. Each share represents a small ownership stake in the company. However, the price of a single share can be quite high, especially for well-known companies with a lot of value.
This can be a barrier to entry for many investors, especially younger ones with limited or no disposable income.
This is where fractional shares come in. They allow investors to buy a smaller portion of a single share rather than purchasing a whole share.
For example, suppose a share of a company’s stock is trading for Rs.70,000. In that case, an investor could buy a fractional share for Rs.500 or even Rs.100 if the company allows it. This allows investors to get exposure to a wide range of companies and industries without spending much money upfront.
But how do fractional shares work?
Fractional shares investing is buying a piece of a whole share. The company’s stock is divided into smaller units, and the investor gets a portion of one of these units.
The value of the fractional share is based on the current price of the whole share, and the investor owns a proportionate amount of the company based on their investment.
For example, if an investor buys a fractional share worth Rs.500, and the price of a whole share is Rs.1000, they own half of a share. If the stock price goes up to Rs.150, the value of the fractional share also goes up to Rs.75. The investor owns a smaller piece of the company, but they still get the same percentage return on their investment as someone who owns a full share.
Do fractional shares pay dividends?
Yes, fractional shares are entitled to receive dividends just like whole shares. When a company issues dividends, they are usually paid out per share. So, an investor owns a fractional share. In that case, they will receive a proportionate dividend based on their investment.
For example, if a company issues an Rs.1 dividend per share, and an investor owns a fractional share worth Rs.50. In that case, they will receive 50 paise in dividends. This can be a great way for investors to earn passive income from their investments, even if they don’t have much money to put into the market.
Can you sell fractional shares?
Yes, fractional shares trading can be bought and sold just like full shares. They are traded on the stock market like any other security and can be bought and sold through a brokerage account. When investors sell their fractional shares, they will receive the current market price for their investment.
Should you buy fractions of shares?
Whether to buy fractional shares or not is a personal decision that depends on your investment goals and financial situation. Here are a few things to consider:
- Fractional shares allow investors to start investing with little money and diversify their portfolio by buying a portion of a single share rather than a full share.
- Fractional shares are an excellent way to invest in high-priced stocks that may otherwise be out of reach. For instance, if a share of a company’s stock is trading for Rs.1,000, you may not be able to afford a full share. However, you could buy a fractional share for a smaller amount, such as Rs.100 or Rs.200. This can be a good way to gain exposure to a company without committing a large amount of money upfront.
- Fractional shares may not be as liquid as full shares. They may not be available for all companies, making it harder to sell or invest in certain stocks.
Conditions under which you may receive fractional shares
- Dividend Reinvestment Plans (DRIPs): Some companies offer DRIPs that allow investors to automatically reinvest their dividends into additional shares of the company’s stock. These shares can be full or fractional, depending on the plan.
- Stock Splits: Some companies may choose to split their shares, resulting in fractional shares for investors. For example, if a company does a 2-for-1 stock split, an investor who owns 100 shares will now own 200 shares, but each share will be worth half as much as before.
- Fractional shares through a brokerage account: Many brokerage firms offer fractional shares as part of their investment offerings. Investors can open a brokerage account, deposit funds, and then use those funds to buy fractional shares of stocks of interest.
- Micro-investing apps: Many apps allow investors to buy and sell fractional shares. These apps often have low or no minimum investment requirements, making it easy for investors to get started with small amounts of money.
- Mutual funds and ETFs: Some mutual funds and exchange-traded funds allow investors to buy fractional shares. These funds comprise a basket of stocks or other securities. Investors can buy a portion of the fund rather than purchasing individual stocks.
Fractional shares allow investors or traders to buy a small portion of a single stock rather than purchasing a whole share. They can be a good option for those just starting out investing and who need more money to put into the market.