What is a fractional share? An in-depth guide for investors

What is a fractional share?

A fractional share refers to a portion of equity that is less than a whole share. These shares often arise from events like stock splits or dividend reinvestment plans (DRIPs). They are not usually traded on the stock market and can pose challenges when it comes to selling, despite their value to investors.

Understanding a fractional share

Fractional shares can originate from various sources, such as dividend reinvestment plans (DRIPs), stock splits, and mergers and acquisitions.

DRIPs allow investors to use dividends to purchase additional shares, often resulting in fractional shares as dividends are reinvested. Similarly, capital gain distributions and dollar-cost averaging programs can lead to acquiring fractions of shares.

Stock splits, like a 3-for-2 split, may result in an uneven number of shares. For instance, investors with an odd number of shares before the split would end up with fractional shares afterward.

In mergers and acquisitions (M&As), companies combine stocks at a predetermined ratio, often leading to shareholders holding fractional shares due to the combination process.

Some brokerage firms intentionally split whole shares to offer fractional shares to clients, especially with high-priced stocks like Amazon (AMZN) or Alphabet, Google's parent company (GOOGL). For instance, as of March 2020, AMZN was priced at over $1,800 per share, and GOOGL was over $1,100 per share.

Fractional shares often provide the only opportunity for individual investors to invest in such companies. For example, a young investor with limited funds may want to invest in Amazon but only has $1,000. Since this isn't enough to buy a full share, they might seek out a brokerage firm that offers fractional shares. They could then invest part of their money in a fraction of an Amazon share and allocate the rest to lower-priced stocks where they can afford whole shares.

Trading fractional shares

Selling fractional shares can typically only be done through major brokerage firms, which may combine them with other fractional shares to make up a whole share. However, if the market demand for the stock is low, selling fractional shares may take longer than expected.

Not everyone wants to hold onto fractional shares, especially if they acquired them unintentionally through events like stock splits. For instance, if an investor originally had 225 shares of XYZ stock priced at $12 per share, a 3-for-2 stock split would leave them with 337.5 shares priced at $8 each. If there is high demand for XYZ stock, it increases the likelihood of finding a brokerage firm willing to accept the fractional share. Alternatively, they could seek a brokerage firm willing to sell an additional half share to round up their total shares to 338.