What Are Fractional Shares?

Written By Guest Post
Last updated October 16, 2020

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October 16, 2020

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A fractional share refers to a portion of equity as opposed to buying one whole share.

Equity refers to the amount of money that would be returned to shareholders if all company assets were liquidated and debt paid off. It is important to note that equity is the most common way of assessing a company’s financial status.

Fractional shares may occur, including stock splits, dividend reinvestment plans, capital gains, and mergers and acquisitions.

  • Dividend reinvestment plans is a situation whereby investors give the option of buying stocks using dividend payouts. Reinvesting capital gain distributions and dollar-cost averaging programs to purchase shares also result in fractional shares.
  • When an investor ends up with an odd number of shares due to stock splits, it also results in fractional shares.
  • In mergers and acquisitions, fractional shares arise when companies combine a new common stock using a predetermined ratio.
  • Some brokerage firms split high priced shares to allow everyone to access these shares for small amounts of money.

One can only invest in fractional shares through selected major brokerage firms. This is because they are not available on the open market.

What are the Benefits of Investing in Fractional Shares

Investing in fractional shares has numerous perks including:

  • Investment opportunity for beginners with smaller amounts of money.
  • Anyone, including beginners, can buy a portion of the desired company share with little money. In the past, investors were required only to purchase full-shares in a company.

Diversified Portfolio for Less

Fractional share gives you a more comprehensive array of stocks. For a similar amount of money, one can buy fractional shares of more than one company.

There’s always the possibility of losses from investing in fractional shares, just like shares traded in the open market. However, investors focused on investing for the long haul will find investing in fractional shares profitable.

Since investing in fractional shares is the most recommended investment for beginners, one needs to invest in as wide a variety of stock as possible while striving to do adequate research before investing.

Various brokers offer fractional shares;

  • Acorns allow people to investing for as little as 1 dollar a month.
  • M1 Finance offers many of the same investing options as traditional investing firms.
  • Betterment allows for automated investing.
  • Stash is great option for beginners.

Here is our review of some of the best fractional share investment sites.

If the stocks you buy pay dividends, then fractional shares purchased from such the same company will also earn a dividend. Investors should utilize dividend-earning stocks. At the end of the financial year, dividend-paying stocks grow the investor’s portfolio without additional cash.

Fractional shares offer one of the easiest ways of investing, especially for beginners in investing and investors who can’t afford whole shares. It is a new way of becoming a shareholder of several companies.

A more diversified portfolio is better because investors can balance out the risks. Much like investing in the open market, investors in fractional shares need to be equally cautious.

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