Investing in Fractional Shares

Fractional shares offer investors an opportunity to purchase pieces of stock shares. While fractional shares can offer flexibility and convenience, it’s important to understand their associated limitations and how your brokerage firm handles them.

What Are Fractional Shares?

A fractional share represents ownership of less than a full share of stock. Rather than having to purchase a whole share of stock, fractional share investing allows you to buy a fraction of a share, such as 0.5 or 0.1 shares, depending on how much money you want to invest. For example, if a single share of a company trades at $1,000 and you invest $100, you’d receive 0.1 shares.

Are Fractional Shares New?

In the past, the use of fractional shares was limited, such as through dividend reinvestment plans (DRIPs), which automatically reinvest your stock dividend in the paying company’s shares rather than distributing it as cash. Since the dividend amount will almost never be precisely divisible by the current share price, companies that offered a DRIP program sometimes issued fractional shares rather than sending investors the excess cash every quarter.

In recent years, though, fractional shares have become more widespread and have evolved as an integral part of a micro-investing strategy, with a number of firms making fractional share investing available to individual investors. 

How Do I Access Fractional Shares?

The availability of fractional share trading varies by brokerage firm. Some make fractional share trading services available for a wide range of listed stocks, including exchange-traded funds (ETFs), while others have more limited availability (for example, only large-cap stocks or ETFs) or don’t offer fractional share trading at all. 

What Are Some Features of Fractional Share Investing?

• Access to Higher-Priced Stocks – Fractional shares give you access to higher-priced stocks or ETFs without the financial commitment of purchasing full shares—which, in some cases, can cost thousands of dollars.
• Diversification – If you’re a small account holder, purchasing fractional shares can allow you to invest in a wider range of securities than you otherwise could. This can help you build a more diversified portfolio.
• More Precise Portfolio Balancing – If you want to lighten your position to take profits or rebalance your portfolio, using fractional shares lets you reduce by the precise amount you’d like since fractional share trading allows you to buy or sell specific dollar amounts rather than whole shares.
• Full Use of Funds – Investors who only buy whole shares might end up having some cash left over. By also purchasing fractional shares, you can put those extra funds to work rather than leaving them uninvested. 

What Are Some Potential Limitations of Fractional Share Investing?

• Limited Transferability – At the moment, you can’t transfer fractional shares to another brokerage firm. So if you want to move your investment or an account containing fractional shares, you’ll have to sell them first, potentially incurring taxes and fees. Consider talking with a tax professional about potential tax impacts based on your circumstances.
• Impact on Order Execution – Some brokerage firms execute fractional share orders in real-time. Others aggregate orders of customers’ fractional shares, collecting customer orders throughout the day and then executing them as orders of whole shares. The process your brokerage firm uses to handle buying and selling of fractional shares might impact the price you pay or receive for a fractional share order. Ask your brokerage firm for specific details about their processes.
• Limited to Regular Trading Hours – You often can’t trade fractional shares outside of regular market hours, which are from 9:30 a.m. to 4 p.m. ET. In other words, extended hours trading might not be available for these shares (i.e., no after-hours or pre-market trading).
• Voting Rights – Investors typically receive one vote per share of common stock they own. As a fractional share owner, you might not have shareholder voting rights. While some brokerage firms allow proxy voting for holders of fractional shares, other firms don’t. Ask your firm whether you’ll have any voting rights associated with fractional share purchases, and consider how important this is to you.

As you consider whether investing in fractional shares is a helpful tool for you given your financial goals, be sure to check with your brokerage firm to learn its rules and offerings.

Learn more about investing.