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How to invest in fractional shares
Fractional shares are a low-cost way to invest in company stocks. Find out what fractional shares are and how to buy some.
What are fractional shares?
When you buy shares in a company, you buy a little slice of it. A fractional share is a slice of a slice of company pie. The original slice was the “share”, but if you cut that slice in half, you have 2 fractional shares instead. Sometimes fractional shares are created accidentally, such as with a dividend reinvestment plan (see the box below), stock splits or mergers. Other times, the splitting is completely intentional, and done by a broker.
What is a dividend reinvestment plan?
A dividend reinvestment plan is when you agree with your broker that they will re-invest the dividends you receive to buy more shares. Under this scheme, you forego receiving payments in favour of growing the value of your investments more quickly.
How much do fractional shares cost?
The size of your slice of the company pie depends on the size of the company and the cost per share. For example, if a company is valued at CAD$1.3 billion and has a share price of $350, you’d need to have around 37,000 shares of the company to own 1% of its pie. (That’s an expensive dessert!) You won’t have to buy as many shares to own 1% of a smaller company with lower share prices. Keep in mind that these figures change all the time.
Intentional fractional shares
When a company or broker offers fractional shares, it is allowing you to get access to stocks and shares that you might not usually have access to due to the cost of one share.
For example, chocolate company Lindt has a share price of 83,300 Swiss Francs, which is around 120,380 Canadian dollars. Unless you have that kind of money you wouldn’t be able to have exposure to Lindt. With fractional shares, you can buy a fraction of one share, at a proportionately lower price point.
Fractional shares also allow investors with limited funds to start investing. One of the best ways to manage risk in a portfolio is to diversify it, which is impossible if you only have enough for one share. With fractional shares, you can still split your available funds between a range of different companies and diversify your portfolio like any other investor, just on a significantly smaller scale.
Where to buy fractional shares
You can buy fractional shares on certain stock trading platforms including Interactive Brokers and Canadian ShareOwner Investments Inc. Some platforms allow you to invest in fractional shares through exchange traded funds (ETFs). ETFs are like mutual funds in that you buy shares and/or bonds in a single fund containing stocks from many different companies. So, in a sense, you own fractions of all the companies in the fund.
However ETFs can be traded throughout the day like stocks, whereas mutual funds can only be traded once per day after the stock market closes. Additionally, ETFs tend to have lower management and administration fees, because mutual funds are often more actively and professionally managed.
Compare brokers that offer fractional share trading
Dividend reinvestment plans allow you to reinvest your dividend payments into more shares, which slowly increases your equity. If you don’t receive enough in dividends to purchase a full share, then you’ll get a fractional share. If you hold the shares over a long period and receive several fractional shares in this way, then they’ll be added up to make full shares, like loose change.
There are several different terms for stock splits, including scrip issues, bonus issues, capitalization issues or free issues. No matter what they’re called, they do the same thing.
Sometimes companies choose to split their shares up to create more and make them more liquid. The split doesn’t add any additional value to what there was before. There isn’t a set way to split the stocks, sometimes it might be 2 for every 1 the shareholder owns, another time it may be 3 for every 2 the shareholder owns.
In the latter example, if a shareholder owns an odd number of shares, then the remaining share will turn into 1.5 shares, leaving the shareholder with a fractional share.
A more recent example of a stock split is Apple’s latest one in 2014. It issued a split of 7 for 1, which meant that for every share a shareholder owned, they had 7 after the stock split. This lowered the share price from around USD$650 to just over USD$90, which increased demand for Apple’s shares.
Mergers and acquisitions
When 2 companies merge together, or one company acquires another, fractional shares may be inadvertently created. This is because an attempt will be made to ensure that one share in one company is equal to one share in the other. This might result in some stock splits or reverse stock splits.
Can you still receive dividends when you have fractional shares?
Yes, you can. Although, it’s worth noting that if rounding means that you’re due less than a penny in dividends, you’re unlikely to see it hit your account. Fractional share dividends will be split based on the portion of a share that you own. So if shareholders will receive $1 per share in dividends, then 50% of a share will get you 50 cents.
Fractional shares are a great way to invest if you don’t have a lot of money to offer upfront. However, the value of your investment varies depending on the value of the company you’re investing in and the cost of its shares. Currently, there aren’t many Canadian investment platforms that let you buy fractional shares, but that doesn’t mean you’re entirely out of options.
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