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What are Fractional Shares?
Fractional shares are partial shares of a company’s stock. Instead of buying a whole share, you’re only buying a part, or a fraction, of a share. Fractional shares make investing in high-priced stocks and ETFs (Exchange Traded Funds) more affordable. You decide how much you’re willing to invest, and a participating brokerage allows you to buy or sell pieces of a full share proportionate to that dollar amount.
This article will help explain what fractional shares are, their benefits and risks, and how you can invest in them.
Definition of fractional shares
Fractional shares represent a piece, or fraction, of a company’s stock.
Fractional shares let investors invest a specific amount of money into a given stock or ETF, regardless of its share price. Instead of deciding how many shares you want to buy, you decide how much you want to invest. If a stock is trading at $1,000 per share, but you only want to invest $200, you can use that $200 to buy 1/5th of a share.
How are fractional shares made available?
Fractional shares are made available by participating brokerage firms who offer their clients the ability to buy or sell partial shares.
Shares can also be divided into smaller parts as a result of dividend reinvestment plans, stock splits, and mergers and acquisitions.
- Dividend Reinvestment Plans (DRIP) let investors automatically reinvest cash dividends into additional shares. This can result in the creation of fractional shares when dividends paid aren’t enough to buy a full share. However, it's important to note that not all brokerages in Canada may offer DRIP services, and some may offer DRIP only on whole shares.
- Stock splits can sometimes create fractional shares depending on the stock splitting ratio used and the number of shares you own. For example, a 3:1 stock splitting ratio would convert every share owned, into three. If you only owned one share when the stock was split, your one share would end up getting converted into 3 shares.
- Mergers and Acquisitions (M&As) also create fractional shares when two companies end up combining common stock using predetermined ratios.
How do fractional shares pay dividends?
Fractional shares pay dividends similar to any other stock. As long as the stock pays dividends to shareholders, owners of fractional shares will receive dividend payments as well. Payments are proportional to the percentage of a share you own. If you own 3/4 of a share, your dividend payment will be 3/4 the dividend paid to owners of a full share.
Why invest in fractional shares?
Investing in fractional shares provides certain benefits.
1. Enhanced Diversification
- Easier Portfolio Construction: Fractional shares can make diversifying your portfolio more convenient. You can also take advantage of fractional shares to allocate precise amounts of capital across a wider range of stocks, facilitating better diversification without the need to purchase whole shares.
- Risk Management: By diversifying investments more effectively, you can reduce exposure to the volatility of any single stock.
2. Increased Flexibility:
- More Accessibility: Fractional shares make investing in high-priced stocks more accessible, allowing you to invest in stocks you might not otherwise be able to afford.
- Precise Allocation: Fractional shares allow you to invest exact dollar amounts, thereby, helping you align investments more closely with your financial goals and strategies.
- Better Rebalancing: It simplifies portfolio rebalancing, enabling more accurate adjustments to maintain desired asset allocations.
3. Efficient Use of Capital:
- Minimized Idle Cash: With fractional shares, you have the opportunity to invest residual cash that might otherwise remain idle. This would help ensure that your entire portfolio is working toward growth.
- Dollar-Cost Averaging: Fractional shares also allow for easier implementation of dollar-cost averaging strategies, where you can invest fixed amounts regularly, smoothing out the impact of market volatility.
4. Custom Investment Strategies:
- Thematic Investing: With fractional shares, you can tailor your portfolios to reflect specific themes or sectors of interest without the constraints of whole-share purchases.
- Personalized Goals: Fractional shares also enable you to pursue more personalized investment strategies that align with your unique financial objectives and risk tolerances.
5. Access to Expensive Stocks:
- High-Value Stocks: With fractional shares, you can invest in high-priced stocks like Amazon or Google without committing to the cost of a full share, which means you can participate in premium investments with smaller amounts of capital.
- Tech and Blue-Chip Stocks: Access to fractional shares can prove to be highly valuable if you are seeking to invest in top-tier tech or blue-chip companies without over-concentrating your portfolio in a single stock.
Overall, fractional shares provide you with greater control, flexibility, and efficiency in managing your investment portfolios, allowing for more sophisticated and tailored investment strategies.
Limitations of fractional shares
There are some downsides to investing in fractional shares as well.
Trading challenges
Fractional shares can’t be bought or sold on the open market. You can only purchase and sell these shares through participating brokerages.
Lower investment income
Fractional shares provide less investment or dividend income than full shares. While you may still receive dividends, your payments will be relative to your holding. Also, not all companies may allow DRIP service on fractional shares.
Voting rights
Shareholders can normally vote, if they hold common shares, in important company decisions. However, depending on the brokerage, those voting rights may not be extended to owners of fractional shares if you own less than a whole share. Some brokerages offer rights identical to that of a full share position holder and all votes of fractional shareholders are collectively pooled before being communicated to the company.
How to buy fractional shares?
Fractional shares can only be purchased through a participating brokerage firm.
If you’re interested in buying fractional shares, start by looking for a brokerage that offers them. Fractional shares can be purchased through some online platforms, but the number of online brokerages offering this service is still limited. TD Direct Investing and TD Easy Trade™ have introduced the ability to trade fractional shares to make investing more accessible and simplify portfolio diversification
Fractional Investing with TD Direct Investing
Fractional Investing with TD Easy Trade™
FAQs related to fractional shares
What happens to fractional shares when you switch brokerages?
Unlike full shares, fractional shares cannot be transferred from one brokerage to another. If you switch brokerages, any fractional shares you own will be liquidated. This can result in you earning capital gains, which can often have tax implications for investors.
How do you profit from fractional shares?
Fractional shares earn profits the same way as full shares. If the stock pays dividends, you’ll receive dividend payments based on the percentage of the stock you own. For example, if you own 1/4 of a stock that pays out a $1 dividend, you’ll receive $0.25. If the value of the stock increases after you buy it, you can also sell the fractional share at a profit.
Is it hard to sell fractional shares?
Fractional shares purchased through a brokerage can be sold the same as any full share. If you decide to sell a fractional share, simply place a sell order with your brokerage firm and they will handle the rest.
Are fractional shares risky?
Fractional shares can be bought with less money than required for a full share, allowing investors to commit less money to a single stock. As with any stock/ETF, there’s never any guarantee that the investment will be profitable. Limit your risk by thoroughly researching the costs and potential benefits of a fractional share before deciding to buy it.
Conclusion
Fractional shares help you invest in the stocks/ETF you believe in, and not just the ones you can afford. Fractional shares can be purchased at a fraction of the cost of buying a full share. They make investing in high-priced stocks more affordable and can help you diversify your portfolio.
As with any stock, investing in fractional shares is never risk-free. Always do your own research before deciding to invest in any stocks, including fractional shares.
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