The benefits of fractional shares for investors

Have you ever been left with a small balance on a gift card because there wasn’t anything else you could both afford and wanted to buy? You may have run into a similar issue when buying investments like stocks and ETFs in whole share quantities.

Companies issue stock in whole units known as shares. Stocks are then traded on the open market in these full share quantities. As a result, most brokers restrict investors to buying and selling stock in whole share quantities.

How Are Fractional Shares Different From Whole Shares?

Even if you only trade stocks in whole shares, you could wind up with fractional shares due to corporate actions like stock splits and dividend reinvestment plans (DRIPs).

What are fractional shares? They are partial shares equal to less than one full share. Visualize fractional shares like the segments that make up an orange. If an orange has ten segments, each segment represents a small portion of the entire orange. If a whole orange represents 1 full share of stock, each segment of the orange symbolizes a 1/10th fractional share.

To help illustrate how an investor might receive a fractional share as a result of a corporate action, let’s use an example. Barry owns 725 shares of ACME Inc. when the company announces a 3-for-2 stock split. This means that for every 2 shares Barry owns prior to the split, he’ll have 3 shares afterwards.

In other words, his new number of shares is 1087.5 (725 x 3/2). Brokers have varying policies when it comes to fractional shares. Barry’s broker doesn’t allow him to trade fractional shares so they replace the 0.5 share he was entitled to with its cash value instead.

Flexible Purchasing Power Of High Price Per Share Stocks

Fractional shares can be advantageous when you are low on cash, or don’t want to spend a lot of money on a trade, but wish to gain exposure to a stock that has a higher price per share.

For example, if one share of XYZ Company is trading at $100 per share, you can use fractional shares to purchase $10 worth of XYZ Company and own 0.1 share of XYZ Company ($10 trade / $100 per share = 0.1 share of ownership). Fractional shares make it easier for investors to buy stocks like Alphabet Inc. (GOOG) – recently trading over $600/share – that have high prices per share.

Put All Of Your Available Cash To Work Immediately

Fractional shares also let you conveniently put all of your available cash into the markets immediately. How does that work? Let’s say you have $110 in cash that you want to invest in XYZ Company. You can use fractional shares to purchase 1.1 shares ($110 in cash / $100 per share = 1.1 shares of ownership) all in one trade.

Even More Benefits Of Fractional Shares

Fractional shares are eligible for dividends, just like full shares.

Fractional share can be trading in real-time, not batched and traded at pre-defined times during market hours.

Another benefit of fractional shares is putting your cash to work on a regular basis and potentially improving your returns through dollar cost averaging. Because you can choose the exact dollar amount, you’re investing, you can do so on a more regular basis with any fixed amount.