What Is a Fractional Share?
Less than one full share of equity is called a fractional share. Such shares may be the result of stock splits, dividend reinvestment plans (DRIPs), or similar corporate actions. Typically, fractional shares aren't available from the stock market, and while they have value to investors, they are also difficult to sell.
- A fractional share is a portion of an equity stock that is less than one full share.
- Fractional shares often result from stock splits, which don't always result in an even number of shares.
- Mergers or acquisitions create fractional shares, as companies combine new common stock using a predetermined ratio.
- Capital gains, dollar-cost averaging, and dividend reinvestment plans often leave the investor with fractional shares.
- Fractional shares don't trade on the open market; the only way to sell fractional shares is through a major brokerage.
Understanding a Fractional Share
Fractional shares come about in a number of ways.
- Dividend reinvestment plans (DRIP) often create fractional shares. A dividend reinvestment plan is a plan in which a dividend-offering corporation or brokerage firm allows investors to use dividend payouts to purchase more of the same shares. As this amount "drips" back into the purchase of more shares, it is not limited to whole shares. Reinvesting capital gain distributions and dollar-cost averaging programs can also result in purchasing fractional shares.
- Stock splits don't always result in an even number of shares. A 3-for-2 stock split would create three shares for every two shares an investor owns, so an investor with an odd number of shares would end up with a fractional share after the split. Three shares would become 4½, five would become 7½, and so on.
- Mergers and acquisitions (M&As) may also create fractional shares since companies combine new common stock using a predetermined ratio. The ratio often results in fractional shares for shareholders.
Some brokerage firms will split whole shares intentionally so they can sell fractional shares to clients. This division of shares is most often the case with high-priced stocks like Amazon (AMZN) or Alphabet, Google's parent company (GOOGL). As of March 2020, AMZN was selling for more than $1,800 per share, and GOOGL was selling for more than $1,100 per share. Fractional shares often can be the only way individual investors can buy stock in
For example, a young investor with limited funds might have their heart set on buying stock in Amazon. Starting with $1,000 to invest, they won't have enough
to buy a full share of stock, so they might find a brokerage firm
willing to sell a fractional share. They could invest half of the money
in one-third of a share of Amazon and use the other half to invest in
lower-priced stocks that would allow them to buy full shares.
In the event of stocks splits, mergers or acquisitions, shareholders sometimes are given the option of obtaining cash in lieu of the fractional shares. The income received is taxable.
Trading Fractional Shares
The only way to sell fractional shares is through a major brokerage firm, which can join them with other fractional shares until a whole share is attained. If the selling stock does not have a high demand in the marketplace, selling the fractional shares might take longer than hoped.
Not everyone wants to hold onto fractional shares, especially if they ended up with them for inadvertent reasons such as stock splits. An investor might have 225 shares of XYZ stock priced at $12 per share. After a 3-for-2 stock split, they would end up with 337½ shares priced at $8 per share. If there is a high demand for XYZ stock in the market, they'll be more likely to find a brokerage firm willing to take the fractional share. Or, they could find a brokerage firm willing to sell another half share to bring their total number of shares to 338.
Real-World Example of a Fractional Share
In November of 2019, Interactive Brokers became the first of the major online brokers to offer fractional shares trading. On January 29, 2020, Fidelity announced it will offer fractional shares trading of equities and ETFs.