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How to invest in fractional shares
Find out what fractional shares are, how they come about and how you can get your hands on some.
Just one share of some companies can set you back thousands of dollars, fractional shares give you the opportunity to invest in these companies by buying small parts of their shares. Find out what fractional shares are, how they’re created and how you can invest in 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 two 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 – this is quite new in the investing world and offered by Stake, Hatch and Sharesies, for example.
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.
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, with a worth of around US$1.3 billion and a share price of around US$350 at time of writing, you’d need to have around 37,000 shares in Apple to own 1% of its pie. That’s an expensive dessert! These figures change all the time. If you’re interested in finding out more about Apple’s share price then check out our page on buying Apple shares.
How to invest in fractional shares
- Find a stock broker. You’ll need one that lets you invest in fractional shares. Take a look at our list below and read reviews to make sure they suit your needs.
- Sign up and fund your account. You’ll need to provide some personal details and information about how you’ll fund your account.
- Find a fractional share. Research some of the shares you’re interested in and find it on your chosen platform.
- Choose how much you want to invest. With these platforms you typically type in how much you want to invest and the provider will deal with how much of a share that equates to.
- Hit buy. It’s as easy as that!
Can you buy fractional shares in NZ companies?
Yes you can. NZ fractional shares aren’t very common, but you can buy them through Sharesies.
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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”, “capitalisation 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.
An example of a stock split was 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 $650 to just over $90, which increased demand for Apple’s shares.
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.
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.
Pros and cons of fractional shares
- They get you access to expensive stocks and shares.
- Suitable for those with only a small amount of money to invest.
- If your provider has quite high fees, you could end up spending a lot of money on your fractional shares.
Bottom line: Are fractional shares worth it?
Fractional shares can get you access to expensive shares that you might not get the opportunity to invest in otherwise. You can choose to invest in other companies with lower priced stocks if you don’t think it’s worth buying a fraction of a share. Make sure you’ve worked out the fees you’d pay for your shares – buying half a share doesn’t halve your fees!
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