What is a 'Fractional Share'
A fractional share is a share of equity that is less than one full share. Fractional shares usually come about from stock splits, dividend reinvestment plans (DRIPs) and similar corporate actions. Normally, fractional shares cannot be acquired from the market, and while they have value to the investor, they can be difficult to sell.
BREAKING DOWN 'Fractional Share'The only way to sell fractional shares is through a major brokerage firm who can pair it with other partial shares until a whole share can be attained. If the selling stock does not have a high demand in the market place, selling the fractional shares might take longer than expected.
Shares Resulting from a Stock Split
Fractional shares can be created in a situation where a company has a 3-for-2 stock split. Suppose you have three shares of XYZ Corp. and XYZ has a 3-for-2 stock split. In this case, you should get an extra 1 1/2 shares, which would be 4 1/2 shares total. Normally, you can't buy half a share in the stock market, but in this case, you could end up with a fractional share. Most companies tend to round up to the nearest whole number of shares when fractional shares occur. In the above example, XYZ Corp. could opt to round up the 1/2 share to leave you with five shares.
Shares Resulting from a Merger or Acquisition
Another scenario where fractional shares can be acquired is from a merger or acquisition between two companies. During this scenario, the combined new common stock shares often are calculated by using a predetermined ratio. Shareholders will usually get either a fractional share of the new common stock or cash in lieu of the fractional shares.
Mutual Fund Fractional Shares
Mutual fund investors often reinvest both dividends and capital gain distributions. This often leaves the investor with fractional mutual fund shares. Unlike stocks that trade instantaneously on an exchange, mutual fund fractional shares are much easier to sell. Since mutual funds are so commonly reinvested and are sold at the end of the market day, brokerage firms have an easier time compiling fractional shares together.
Partial or Odd-Lot Bonds
It is much more uncommon when an investor ends up with an odd number of bonds. Individual bonds are generally sold in increments, such as by 10s, 20s, 25s, 50s, or 100s. Selling 11 bonds on the marketplace will often lead to a sell order not being filled or inaccurate pricing. It is often difficult to buy bonds that are not sold in increments, so it is very rare. But a common example would be when someone inherits bonds. If an investor were to inherit half of 25 bonds, that would be an odd -lot of 12 1/2 bonds. If the newly inherited bonds needed to be sold, it would need to be packaged in a lot of 10. The remaining 2 1/2 bonds would need to be packaged with other partial bonds to be sold.