What is a fractional share?
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 Wombat, eToro and Trading 212, to name a few.
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.
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 80,400 Swiss Francs, which is around £67,600. 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.
Which platforms offer fractional shares?
You can buy fractional shares on certain share-dealing platforms – we’ve listed some major ones below. Some platforms allow you to invest in fractional shares through exchange traded funds (ETFs). We list these below, too.
Platforms that offer fractional shares include:
Platforms that offer fractional shares through ETFs:
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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.
A 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 $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 50p.
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