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Guide to fractional shares in Canada
Learn what fractional shares are, how they work and what benefits they can offer investors like you.
Picture this. You’re new to buying and selling stocks and you want to invest in Shopify, one of Canada’s largest companies. But you only have a spare $100 to invest, and Shopify stocks are priced at $212 each—so you can’t afford to buy even a single Shopify share.
The good news is that you don’t have to wait until you’ve saved enough money to buy one Shopify stock. Instead, you can invest in the company straight away with fractional shares.
What are fractional shares?
A fractional share is a portion of one full share in a company.
When you buy a share (or stock) in a company, you buy a little slice of that company. A fractional share is a slice of a company pie. The original slice was the “share”, but if you cut that slice in half, you have two fractional shares instead.
Many online brokers in Canada allow you to buy and sell fractional shares. This allows you to invest in a company even if you can’t afford its full share price.
But sometimes fractional shares are created unintentionally, like with a dividend reinvestment plan, stock split or merger.
How to buy fractional shares in Canada
In order to buy fractional shares, you’ll need to find an online trading platform or app that supports them. Here’s what you need to do to start trading.
Step 1: Choose a broker
Compare online trading platforms that offer fractional shares. Choose a provider that offers low fees, an easy-to-use trading platform and access to the stocks and markets you want to trade.
Step 2: Create an account
You can sign up for an account online by providing your personal information and contact details. You’ll also need to supply proof of ID and information about your prior investing experience and the source of your funds.
Step 3: Deposit funds
The next step is to deposit the money you want to trade with into your account. You may be able to deposit funds via bank transfer, e-Transfer, wire transfer or bill payment.
Step 4: Place a buy order
You’ll usually need to place a market order to buy fractional shares. Choose the stock you want to buy and the amount you want to purchase to buy fractional shares at the best available price.
Compare brokers that offer fractional shares in Canada
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Are fractional shares allowed in Canada?
Yes, you can buy fractional shares in Canada, but not all brokers allow you to do so. Check with your online trading platform to find out whether they support fractional share trading.
If fractional shares are supported, you’ll need to check your broker’s rules to find out which stocks and ETFs are eligible for fractional trading. Some platforms support US as well as Canadian stocks.
The other factor to be aware of is how fractional share ownership affects voting rights. When you hold full shares in a company, you typically have the right to vote at company meetings. But if you own fractional shares, whether or not you get any voting rights depends on the broker.
What are the benefits of fractional shares?
Access high-value stocks.
Fractional shares make it possible to invest in companies with expensive stock prices. Even if you can’t afford a full share, you can still include blue-chip companies in your portfolio.
Invest with a small amount of money.
Fractional shares allow you to start building a stock or ETF portfolio even if you only have a small amount of money to invest. Depending on your broker, you may be able to invest with as little as $1.
Easier to diversify your portfolio.
Fractional shares make it easy to invest across a wider range of stocks and market sectors, allowing you to build a diversified portfolio.
You still receive dividends.
If the stock you own a fractional share of pays dividends, you’re still eligible to receive dividend income. The dividend you receive is proportional to the percentage of stock that you own. So if you own 0.5 shares and the company pays a $1 dividend, you’ll receive a $0.50 dividend.
Steadily grow your investment balance.
Fractional shares are also handy for steadily increasing your investment. For example, let’s say you want to set aside $50 of your pay each week to invest in stocks. Instead of having that cash just lying around not earning a cent until you save up enough to buy a full share, you can invest it in fractional shares straight away. This also allows you to adopt a dollar cost averaging strategy to protect yourself against market volatility.
What are the disadvantages of fractional shares?
You may not have voting rights.
Owning a fractional share may not entitle you to the same voting rights as full shareholders who can have their say on important company matters.
Can’t be transferred to another broker.
You won’t be able to transfer your fractional shares to another platform. If you want to switch brokers, you’ll need to liquidate any fractional shares you own.
Reduced dividend income.
You’ll receive a lower dividend income from fractional shares than from full shares.
Trading commissions.
Brokerage fees may apply when you buy and sell fractional shares, but some platforms offer commission-free trading.
How are fractional shares created?
You might be wondering what goes on behind the scenes when a company offers fractional shares. Many companies intentionally offer fractional shares in order to give investors access to stocks that they might not usually have access to due to the cost of one share.
For example, chocolate company Lindt has a share price of 11,760 Swiss Francs, which is more than CAD$20,000. Unless you have that kind of money, you wouldn’t be able to have any exposure to Lindt. With fractional shares, you can buy a fraction of one share, at a proportionately lower price point.
There are a few different ways fractional shares are created:
Dividend Reinvestment Plans (DRIPs)
A DRIP allows 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.
Stock splits
Sometimes companies choose to split their shares to create more shares and make them more liquid and affordable. For example, a company might create 2 shares for every 1 the shareholder owns (also known as a 2-for-1 stock split), or 3 shares for every 2 the shareholder owns.
Mergers and acquisitions
When two 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.
How much do fractional shares cost?
The size and price of your slice of the company pie depends on the size of the entire 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. 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.
The cost of a fractional share depends on the price per share, and how much of a share you are buying. In the example above, the share price is $350. If you are buying half a share (a fractional share) this would cost you $175 ($350 divided by 2).
Related: Day trading in Canada
Alternatives to fractional share investing
Choosing individual stocks to invest in can be complicated and time-consuming. But there are a couple of alternative options to consider if you’re looking for an easy way to create a diversified portfolio.
The first option is an exchange-traded fund. These low-cost funds are made up of a basket of securities, and they’re traded on exchanges in the same way as stocks.
So when you invest in an ETF, you’re effectively investing in a wide selection of stocks. For example, you might want to invest in an index fund designed to replicate the performance of the TSX 60 or the S&P 500.
The second option is a mutual fund. These funds also hold a basket of assets but are more likely to be actively managed than ETFs. Learn more in our guide to ETFs vs mutual funds to decide if either option is right for you.
Bottom line
Fractional shares offer plenty of benefits for new investors. They allow you to get started with a small initial investment, they make it easier to create a diversified portfolio, and they’re available from an increasing range of brokers. Compare online trading platforms that support fractional shares to find the right broker for you.
Frequently asked questions about fractional shares
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