Fractional Share: Definition, Examples, How to Buy and Sell
What is a fractional share?
A fractional share is any portion of a single full share of stock. Instead of owning one full share, an investor might own 0.25 or 0.5 shares, for example. Fractional shares let investors gain exposure to expensive stocks or diversify with limited funds.
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Key takeaways
- Fractional shares represent less than one full share of equity.
- They commonly arise from dividend reinvestment plans (DRIPs), stock splits, mergers and acquisitions, or broker-driven share divisions.
- Fractional shares generally do not trade on public exchanges as standalone units; transactions are handled through brokerages.
- Brokers can aggregate fractional holdings into whole shares to facilitate selling.
- Cash paid in lieu of fractional shares is taxable.
How fractional shares are created
- Dividend reinvestment plans (DRIPs): Dividends are automatically used to buy more shares, and purchases can result in fractional amounts.
- Stock splits: Split ratios (e.g., 3-for-2) can produce fractional results for odd share counts.
- Mergers and acquisitions: Share-exchange ratios may leave shareholders with fractional shares.
- Broker-driven divisions: Some brokers break up shares so clients can buy fractional amounts of high-priced stocks, enabling broader access.
How to buy fractional shares
- Use a brokerage that offers fractional-share trading. Many major brokerages now allow investors to buy fractional amounts of stocks and ETFs.
- Fractional purchases can support dollar-cost averaging and allow diversification across multiple positions with limited capital.
How to sell fractional shares
- You generally must sell fractional shares through the brokerage that holds them. The broker may combine multiple fractional pieces into whole shares before executing a sale.
- Liquidity can be slower for some fractional holdings; selling may take longer if demand for the underlying stock is low.
- If you end up with a fractional share after corporate actions, brokers or the company may offer cash in lieu of the fractional portion. That cash payment is taxable.
Advantages and drawbacks
Advantages
* Low-cost access to expensive stocks.
* Easier diversification and regular investing through DRIPs and automated plans.
* Facilitates dollar-cost averaging.
Drawbacks
* Fractional shares don’t trade on exchanges as standalone units—sell orders go through the broker.
* Potential liquidity and timing issues when trying to sell.
* Some brokers may limit transferability between firms.
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Industry adoption
Major online brokers now offer fractional-share trading, making it easier for individual investors to buy portions of high-priced stocks and ETFs.
Summary
Fractional shares let investors buy partial ownership of stocks, enabling diversification and access to expensive equities with small amounts of capital. They most often arise from DRIPs, stock splits, M&A activity, or broker offerings. Buying and selling fractional shares is handled through brokerages, which may aggregate fractions into whole shares to execute trades. Be aware of potential liquidity limitations and the taxability of any cash paid in lieu of fractional shares.