Understanding Fractional Shares: A Beginner's Guide
Investors have many choices when it comes to investments. Selecting the right investment can vary based on the investor's goals, capital, access, knowledge, and more.
Fractional shares are appealing for their low cost, their potential opportunities to diversify a portfolio, and flexibility.
Read on to learn about fractional shares.
What are fractional shares?
Fractional shares are portions or slices of a company’s stock that are less than one whole share.
Instead of buying complete shares, investors can invest in fractional shares based on a dollar amount rather than the number of shares. This can enable investors to manage their investment strategies and allocations with greater flexibility by allocating any amount of money to specific stocks or ETFs, rather than being restricted to whole shares.
Investors also retain the same benefits as full equity stock shares in terms of dividends and capital gains, proportionate to the size of the fractional share owned.
How can investors purchase fractional shares?
Fractional shares are portions of an equity stock that are less than one full share. These shares are accessible through various scenarios. You can acquire them not just by directly purchasing from a brokerage or an online trading platform, but also through opportunities like stock splits, dividend reinvestment plans (DRIPs), and mergers and acquisitions (M&As).
Keep in mind, not all brokerage firms offer fractional shares and even the ones that do, they don't offer them on all stocks and ETFs.
Stock splits
When a company splits its stock, it can increase the number of shares available and potentially enhance trading liquidity. A stock split also lowers the price of a single share, making the company’s stock more accessible to a broader range of investors without fundamentally changing the company’s overall value.
A company can increase the total number of shares by giving existing shareholders additional shares. For instance, in a 3:2 stock split, an investor would receive three shares for every two shares already owned. As a result, an investor might end up with fractional shares — portions of an equity stock that are less than one full share.
There's also reverse stock splits, where a company reduces the number of its outstanding shares. In this case, an investor may receive fractional shares. This may occur when the split ratio doesn't evenly divide an investor's total share count. For example if an investor had five shares of stock, and there’s a 2-for-3 reverse split, they may end up with fractional shares (e.g., 3.33 shares).
Please note that how fractional shares are handled can depend on the company’s policy and the brokerage firm. Some companies might round down to the nearest whole number (in this example, it could be 3 shares), pay out the fractional share in cash, or have other policies.
Dividend reinvestment plans
A dividend reinvestment plan (DRIP) is a program that enables shareholders to automatically reinvest a stock's cash dividends into additional or fractional shares of the underlying company. Investors can use the reinvested dividend amount to purchase fractional shares, accumulating additional smaller portions of shares and expanding their portfolio of stock holdings.
Mergers and acquisitions
When a company merges or it is acquired, its stock may be exchanged for new shares of the acquiring company. Typically, a predetermined ratio is used to combine stocks from different companies during the merger or acquisition process.
For example, if company A merges with company B, five shares of company A might become three shares of company B. This process can result in fractional shares for exisiting shareholders of the targeted company.
How fractional stock works
Fractional stock enables investors to purchase a portion of a single share, rather than requiring them to purchase a whole share. This means that investors can own a piece of a company's stock with a significantly smaller investment and also be able to diversify their portfolios.
For example, if a company's stock is trading at $500 per share, an investor could choose to buy a fractional share for as little as $5, owning 1% of a share.
Why do investors buy fractional shares?
There are many reasons why investors may purchase fractional shares. Here's a few.
Affordability: Fractional shares allow investors to buy a portion of a stock based on a dollar amount, rather than the number of whole shares. This makes it easier to invest in expensive stocks that would otherwise be out of reach costwise to the investor.
Diversification: By owning fractional shares, investors can diversify their portfolios with limited funds. Instead of putting all their money into a single stock, investors can spread their investments across multiple companies.
Accessibility: Fractional shares democratize investing by allowing investors, regardless of their capital, to participate in the stock market. Whether you have a small or large budget, fractional shares provide an opportunity to invest in companies you believe in.
How to buy and sell fractional shares with Moomoo
Investors can buy and sell fractional shares using the Moomoo app. However, investors should keep in mind that certain securities may not be available for fractional share trading.
To get started, we'll show you how to gain access to fractional shares and then how to trade them — all in a few steps.
Step 1: To access fractional shares, go to Markets tab>US> Fractional Shares. Here you can check the list of fractional shares available for trading.
Disclaimer: Images provided are not current and any securities are shown for illustrative purposes only and is not a recommendation.
Step 2: Another way to access fractional shares is to go to the stock's Detailed Quotes page and check the Fractional Shares icon. Currently, there are over 300 U.S. Stocks supported for fractional trading on Moomoo.
Disclaimer: Images provided are not current and any securities are shown for illustrative purposes only and is not a recommendation.
Step 3: To trade fractional shares after finding your desired stock, tap on Trade (in orange) to place an order.
Disclaimer: Images provided are not current and any securities are shown for illustrative purposes only and is not a recommendation.
Step 4: Select either a limit or market order for the order type.
Disclaimer: Images provided are not current and any securities are shown for illustrative purposes only and is not a recommendation.
Step 5: Enter the trading quantity or amount.
Disclaimer: Images provided are not current and any securities are shown for illustrative purposes only and is not a recommendation.
Step 6: Tap on "Buy" to submit your order.
Pros and Cons of fractional share trading
Fractional share trading comes with its share of pros and cons. Take a look:
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FAQs about fractional shares
What is the difference between a stock split and a fractional share?
A stock split occurs when a company either increases or decreases its share count and an investor can end up with fractional shares as a result.
When a company has a forward stock split, it increases shares and distributes additional ones to existing shareholders. For example, in a 3:2 stock split, an investor receives three new shares for every two shares they own.
In a reverse stock split, the company consolidates its existing shares into fewer shares. Any fractional shares resulting from the consolidation are typically converted into whole shares. For example, if an investor held 0.5 shares before the split, they would be converted into 1 whole share after the reverse split.
Fractional shares are a portion of an equity stock that is less than one full share. It can result from stock splits, bought and sold as a fractional share as well as other actions.
But here's where stock splits and fractional shares differ: stock splits affect the total number of shares, while fractional shares allow investors to own smaller portions of a stock.
What is the process of selling fractional shares?
Selling fractional shares can be a straightforward process. The value of the fractional share is determined by the current market price of the full share, multiplied by the fraction of the share an investor owns. The investor receives the cash equivalent of this value, minus any applicable trading fees or commissions.
Is it possible to purchase dividend stocks as fractional shares?
Yes, it is possible to purchase dividend stocks as fractional shares. When buying a fractional share of a dividend-paying stock, an investor owns a piece of the company, just as they would with a full share, it is just a smaller portion. An investor is entitled to receive dividends proportional to the size of their share.
Can you combine fractional shares?
Yes, combining fractional shares is a common practice, especially when an investor has multiple fractional portions of the same stock. To combine fractional share portions, an investor can do so by:
Buying more: Purchase additional shares to round up your fractional holdings. For example, if you have 1.75 shares, consider buying 0.25 more shares to reach a whole number (2 shares).
Participating in stock splits: When a stock splits (e.g., 2-for-1 or 3-for-1), fractional shares can become whole shares. For example, if an investor owns 0.333 shares and the stock undergoes a 3-for-1 split, the fractional shares would become a whole share.
Using a brokerage service: Some brokerages automatically consolidate fractional shares for you, allowing you to hold whole shares.
Disclosures
Fractional shares are illiquid outside of Moomoo Financial Inc. ("MFI"), and cannot be transferred. Not all securities offered by MFI can be traded as fractional shares. See the Fractional Share Trading Disclosure for more details.