What are Fractional Shares?
A fractional share is a portion of an equity that constitutes less than a single full share.
When Does Fractional Share Investing Make Sense?
As the name of the microinvesting trend suggests, fractional shares are a low-cost way for investors to participate in the earnings of high-cost equities.
Cash-strapped investors such as college students stand to gain the most from fractional investing, as well as any other investors who fail to meet the account minimums set by brokerage firms.
Admittedly, many brokers have seen the writing on the wall.
High account minimums are fast becoming a rare barrier to entry but the fact remains that fractional investing can also be a good way for investors with limited resources to diversify their portfolios.
For investors with more resources, investing with fractional shares may fit into overall strategies, but it often makes more sense to buy full shares.
Think of fractional shares like slices of pizza. If a full share of an equity is a whole pizza, then a fractional share is like a slice of pizza.
A slice of pizza costs less than a whole pie, but you only get a single slice.
Just as the costs of fractional shares are a portion of the cost of a full share, they return only a portion of the returns of a full share.
Where Do Fractional Shares Come From?
Fractional shares have traditionally been burdensome for investors.
Portions of a share can’t be sold on the open market, so they have to be collected with other portional shares to make up a full share that can be sold. This process is normally handled by an investor’s brokerage, but it can take time to collect the requisite number of fractional shares.
Fractional shares are created “in the wild” (so to speak) from stock splits, mergers and acquisitions, invested dividends, and odd-lot bonds—such as half of an inheritance of an odd number of bonds, for example.
In the case of microinvesting platforms, however, the portional shares exist more as an accounting concept than as actual portions of an equity.
In most cases, the brokerage or platform holds the title of the full share, and investor returns are calculated based on the amount of money that was paid in.
If an investor should want to sell his or her position, the brokerage (the full share’s owner) may pay out and simply keep the fraction for another investor or may add the fraction into a pool of other share fractions to create whole shares to sell.