General Guides
Regional Guides
Starter Guides
Key Takeaways
- A fractional share is ownership of part of a share of a company.
- Fractional shares allow small investors to own parts of high-priced shares.
- Most large brokerages offer fractional share trading.
- Fractional shares trading may incur higher fees
A fractional share is a divisible part of a company share. Here we explain how fractional shares work and the rules for trading in these shares.
What Are Fractional Shares?
A fractional share represents ownership in a company in an amount less than the value of one share. Perhaps better named “fractions of shares,” these ownership amounts allow smaller investors to buy into companies with high share prices. In the past, fractional shares were typically only issued for dividend reinvestment so investors could transfer dividends back into equity in the same company. Stock splits, mergers, and acquisitions can also create fractional shares when common value changes according to uneven ratios.
Today, some brokerages also allow investors to purchase fractional shares, though not all of the companies they trade with allow fractional share trading. Fractional shares pay out dividends by percentage of ownership, so if you own 20% of one share, you’ll receive 20% of the dividends for that share.
Imagine you want to buy stock in a restaurant chain, and Newport, California’s Chipotle Mexican Grill is your number-one choice. However, you find out that the company’s share price is $3,000, and you only have $1,500 to invest. You don’t have enough to buy a single share, but if the company allows fractional shares, you’ll be able to buy half a share of CMG and enjoy 50% of the dividends that share accrues when the company makes a profit.
Fractional shares can be either ordinary shares or preferred shares.
Benefits of Fractional Shares
There are several benefits of fractional shares for both investors and companies looking for equity capital. These include:
- Access to high-priced stocks: As in the example above, many people want to get in on a good deal by investing in companies they think will really boost their performance. However, they may have limited funds to invest, and without fractional shares, they may not have the money to buy a single share. By buying fractional shares, they can still enjoy some equity in the company and reap the rewards that may be produced.
- Diversification for small investors: Small investors often find it difficult to diversify their stock portfolios due to high share prices. If they only have $1,000 to invest and share prices are in the $100s, they’ll find it hard to buy more than one share in each of just a few companies. Instead, by buying fractional shares, they can spread their risk over more companies and better protect their investments.
- Increased capital: When a company sells shares at high prices, it can discourage smaller investors from seeking equity. If they can buy fractional shares, however, many more small investors can be encouraged to invest their funds, allowing companies to reach their capital goals.
| Feature | Fractional Shares | Full Shares |
|---|---|---|
| Minimum investment | Any dollar amount (e.g. $10, $50) | Full market share price |
| Dividends | Paid proportionally | Paid in full |
| Voting rights | Usually none | Full shareholder voting rights |
| Portfolio diversification | Easier for small investors | Requires more capital |
| Transferability | Sometimes restricted | Fully transferable |
Challenges and Risks of Fractional Shares
While fractional shares carry with them a lot of positive attributes, it’s also important to keep their limitations in mind. The downsides of fractional shares include these factors:
- Potential for higher transaction fees: Brokerages charge transaction fees for share investing, and these fees may be higher for fractional shares. These higher fees can eat away at investment profits and make fractional share investing less attractive.
- Liquidity issues: Some brokerages don’t allow trading of fractional shares in real-time. Instead, they may only let trades conclude once markets are closed. This can make trading fractional shares difficult and less profitable. In addition, not all brokerages support fractional shares. When you try to change brokerages, you may not be able to bring your fractional shares with you and may be forced to sell them first.
- Lack of control: Shareholders who hold only fractional shares and no whole ones don’t receive any voting rights. While they may represent a large proportion of shareholders, they can’t be given fractions of votes, and therefore, they don’t get to have any say in how the company is run. While this might not be a major concern for small investors who wouldn’t expect to have much of a voice anyway, it can help to concentrate power over a company in the hands of too few people. The company might, therefore, miss out on the valuable diversity of opinions that larger groups can offer.
How to Invest in Fractional Shares
If you want to buy fractional shares, you’ll normally have to open an account with a major brokerage. You’ll need to add funds to your account, research and select companies to invest in and buy the fractional shares you want to hold.
Major companies like Fidelity, Charles Schwab (where they call fractional shares ‘stock slices‘), Interactive Brokers, E-Trade, Vanguard, and several others let their customers buy and sell fractional shares of a large number of companies and ETFs (See NerdWallet).
Fractional share programs lower barriers to employee stock ownership but complicate cap table management, dilution tracking, and exit waterfall calculations for smaller holdings significantly. Simplicity often outweighs inclusion benefits at small company scale. China corporate services advise on equity structure trade-offs for your current stage. MSA Asia recommends structures balancing inclusion and administration efficiently. Speak with our advisors about equity program design.
MSA helps individual and corporate investors structure their investments correctly and remain compliant with international tax regulations. Message →
FAQ
Fractional shares are normally bought and sold through large brokerages, just like regular shares. Large brokerages can offer fractional shares because they have enough investors to combine these fractions into full shares to trade with.
Fractional shares still represent ownership in a company and need to be accurately reported on your tax return. When you receive dividends from a fractional share, you need to report the amount you receive as investment income. If you own fractional shares for less than a year, you’ll pay capital gains tax on the profits you make selling them at your normal rate. However, if you hold them for longer than a year, they can be considered long-term investments and are taxed at a lower rate.
