Fractional Share – What is it? How does it Work?

A fractional share refers to a unit of a share that is less than a whole share. Are you amazed? You should not be because it is the reality. However, you cannot trade fractional shares as you trade whole shares in the open market. The good thing is there are many brokerage platforms that allow fractional share trading. 

Are you looking for all the information about fractional shares, then you are on the right platform. In this article, we are going to explain what fractional share is and how it works. Let’s begin right away. 

What is a fractional share?

A fractional share is a unit of stock that is less than a whole share. In other words, it is a partial share of stock, and owning a fractional share means you own only a fraction or portion of the stock. How do fractional shares get created? They are created mainly by stock splits. A stock split is a scenario where a company decides to increase its number of outstanding shares. As a result, the company issues more shares to its existing shareholders. Furthermore, some brokerage firms also split the whole share of a big company like Amazon to make them accessible to average investors. 

How do fractional shares work?

Fractional shares have been around for a long time. However, brokerage firms were not allowing clients to trade fractional shares. Instead, they were only allowing share trading. That isn’t the case anymore. 

Now, you can invest in big companies like Amazon and Apple without buying a whole share. Yes, brokers will only ask how much money you want to invest in a company of your choice. You are no longer limited to buying a whole share in your favorite company. Why are brokers allowing it?

Brokers are allowing fractional share trading to make shares of large companies accessible to all. As you know, the share prices of companies like Amazon are very high. That’s why they were out of the reach of most investors. But not anymore because you can buy fraction shares now. 

Now, what about fractional share ownership? The good thing is it works in the same way as normal stocks. They are entitled to the same percentage of gains or losses as well as subject to the same risk. 

Advantages and disadvantages of fractional share

There are several benefits or advantages of the fractional share. On the flip side, there are certain disadvantages. Let’s see.

Advantages

• Fractional share trading has opened a door for people across the globe with limited resources to invest in big companies. 
• Starting a trading journey with fractional shares suits beginners and younger investors. They can start with small capital and gain experience. 
• Fractional shares have made it possible for small investors to hold positions in companies with very high stock prices. 
• They also play a huge role in helping average investors diversify their portfolios with limited resources. 
• You can also earn dividends but are limited to a fraction of the share you own. For instance, if you won a half share, you will receive half the per-share dividend payment.
• Finally, it suits investors following a dollar-cost averaging strategy. They can invest the same amount of money at regular intervals without worrying about investing in a number of shares. 

Disadvantages

• Fractional shares are not available on all stocks. Instead, they are only available on a few stocks and ETFs. 
• Although fractional shares entitle you to earnings, they don’t reserve voting rights for you. Brokers offering fractional shares wouldn’t let you vote on the company’s issue unless and until you buy a full share.
• Liquidity is a big point of concern when it comes to fractional share trading. Therefore, if you are buying or selling fractional shares of a company with limited demand, you may have to wait to have your transaction completed.