The basis of stock market investing is a share. Each share is one unit of what you own in a company. You are a shareholder when you buy a part of the company’s wealth or capital, and you own some of the company’s shares.
So, what are fractional shares? There is a possibility of buying less than a share of the company’s stock. When that happens, the shares are called fractional shares, ie, a fraction of a unit. Such shares are also called partial shares.
Several Indian brokerages are now offering trading facilities for Indians interested in US securities via their platforms. There is a growing interest in the US for fractional share ownership.
Circumstances under which you may get partial shares
When a company merger or stock split occurs, you are likely to receive only a fraction of the share of stock. This could be half or one-third. Now that you know the answer to the question of what are fractional shares, you would be able to understand the concept of fractional shares investing better. Here’s an example. You have 11 shares of ABC Ltd company. Now, the company has announced a stock split, a 3-for-2 for instance. This means that you will receive three shares for every two shares you have. Since you own 11 shares, you will receive 16.5 shares overall.
In normal situations, you won’t be able to buy a fractional share, but in such a scenario you could be receiving fractional shares. Many companies are likely to round off to the whole number, so you may have 17 shares.
Another situation when fractional shares come up is during mergers and acquisitions. Because companies merge the common shares of the two companies with the help of a pre-fixed ratio, sometimes, fractional shares could emerge.
Fractional or partial shares also crop up during a dividend reinvestment plan. Such a plan is one where a company lets its investors use dividends to buy more shares of the company. Typically, in such a scenario, there is a likelihood of buying fractional or partial shares.
So, what are the pros and cons of buying fractional shares?
- If you are cash-strapped or just starting out on your investment journey, you can buy fractional shares as they allow you to enter the market and benefit from the power of compounding with your limited resources. You can begin investing with small amounts.
- Fractional or partial shares also offer an element of diversification in your portfolio. You can buy a wider range of stocks than you would have otherwise bought.
- Dollar or rupee cost averaging ensures that you invest a fixed amount at regular periods. By doing so, you are not timing the market. Typically, the rupee cost average works well with an exchange-traded fund or a mutual fund. With partial shares, you can leverage the concept of rupee cost averaging better. Because the concept is focused on a consistent rupee amount at fixed intervals and not a share amount, it works well with fractional shares as well.
- On the flip side, not all stocks are made available for fractional investments. This means you may not be able to pick from as many companies as you may have wanted if you were to buy full shares.
- Another disadvantage of fractional shares is that you may not be able to trade them as often or as quickly as full shares. Also, it is not as if all partial shares are in great demand so you may have to wait longer to buy or sell them.
- If you have to pay some regulatory charges upon sale of shares, these charges are often rounded up to the nearest higher number. So, in the case of fractional shares, this could mean more fees.
- You would also need to bear in mind that just as partial shares are a fraction of a full share so are the dividends you receive by owning them. So, if your dividend is Rs 0.50 for every share, you will get only Rs 0.25 for half a share.
Now that you know what are fractional shares, and what their advantages and disadvantages are, you are better equipped to begin your fractional share investment journey. Fractional share investing provides you an opportunity to diversify your portfolio and begin your investment journey with small steps. You have greater flexibility to build your portfolio. On the flip side, not all companies may actually allow you to trade in fractional shares, which may mean you can’t buy shares from a company you have always wanted to.
Indian share market investors are able to invest in the US capital market where fractional share investing is gaining popularity, via Indian platforms that allow them to do so.