What Is 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 market, and while they have value to investors, they are also difficult to sell.
- Stock splits don't always result in an even number of shares.
- Mergers or acquisitions create fractional shares since companies combine new common stock using a predetermined ratio.
- Mutual fund and dividend stock investors often reinvest both dividends and capital gains distributions leaving the investor with fractional shares.
The Basics of a Fractional Share
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.
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 February 2019, AMZN was selling for more than $1,500 per share, and GOOGL was selling for more than $1,100 per share. Fractional shares often can be the only way investors with limited funds can buy stock in such companies.
Other Ways to Create 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.
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.
Real World Example of a Fractional Share
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.
Not everyone wants to purchase fractional shares. Investors sometimes end up with fractional shares for 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.