As you start investing and employ wealth management strategies, you’ll come across different types of stocks, shares, and assets. As the name suggests, fractional shares are a part of a total share of a company’s stock. Instead of owning one entire share, an investor can buy a fraction of a share and add it to their portfolio. They were prevalent, especially after a company’s stock split after mergers, acquisitions, or splits. It allowed previously owned stocks to be split into new ones, which didn’t always result in an even number of stocks.
Nowadays, brokers and investors can buy a fractional share from a company without waiting for a stock split. It allows them to buy stocks according to the money they want to invest in the company. For instance, if one entire stock costs $100, you’re willing to invest only $50 in that company. You must buy a partial stock worth $50, implying that you’re purchasing half of one share. These are excellent options if you’re starting to invest but don’t have enough money to buy the whole stock.
Trading A Fractional Share
However, you must note that you cannot trade these fractional shares in the open market directly; instead, you must buy or sell them through a brokerage. If you own 50 percent of the stock and want to sell your share or buy more of the same stock, you’ll have to trade with the same broker or cash out your holdings and invest in whole shares in the market.
Most brokerages with such investments often offer commission-free trading, meaning you are not required to pay transaction fees when buying or selling a partial share. If you are asked to pay a commission, it usually indicates that the trade isn’t worth it. You would have to cover a significant rate of return on your partial share to ensure that the profit or interest earned can cover this additional cost. Most of the time, it doesn’t work that way, implying that you’re not gaining anything after selling or buying a share, and in some cases, you may even lose out on your money.
What Does It Mean To Buy A Fractional Share?
You make percentage gains proportional to your holding when you buy a partial share. You are treated the same as any other company investor and receive the same benefits of ownership. Moreover, you are also liable to the same amount of risk as the others. The ultimate operations involving the ownership of a share remain the same. The only variable is the value or potion of the stock you own, which would determine the dividend you receive.
Suppose you have a fractional share that pays a dividend. The dividend you receive will be proportional to the portion of the share you hold.
For example, if you own 10 percent of a particular stock and are expected to get a dividend of $100 for an entire share. Then, instead of a dividend of $100, you will receive 10 percent of the original dividend, that is 10 percent of $100, which amounts to $10.
Why Are They Becoming Popular?
These types of investing allow you to broaden your investment pool. By allowing you to buy a part of a share, they will enable you to diversify your investment portfolio at a lower cost. Instead of spending all your investment money in one company, you can now purchase several fractional stocks from different companies and invest in various industries, allowing you to grow your earnings and mitigate risks.
Fractional investments are ideal if you’re looking to invest in several sectors without wanting to spend a lot. You can dip your investments in many companies at once, helping you diversify your investments while reducing risk.