How Do Fractional Shares Work?

As their name suggests, fractional shares are portions, slivers, or slices of stocks and ETFs that are smaller than a whole share.

There are various reasons to consider buying fractional shares. Perhaps you don’t have the funds to purchase an entire share of a stock, or you might prefer to invest a fixed dollar amount in a stock or ETF every month—say, $100—rather than securing a specific number of shares with prices that might change, being $90 one month and $150 the next.

Only a short while ago, the idea of fractional shares in investing was quite novel—it was nearly impossible to buy less than whole shares of stocks and ETFs. While managed funds in Australia have long permitted fractional share investing, the ability to own parts of shares was primarily limited to a few scenarios:

• Stock splits or reverse stock splits. When a company splits its stock, it boosts its share count by giving shareholders additional shares of stock. In a 3:2 stock split, for example, you receive three shares for every two shares you own. So if you owned 15 shares, you would now have 22 ½ shares. That extra half stock is a fractional share. In a 3:2 reverse stock split, you’d end up with two shares for every three you own.
• Dividend reinvestment plan (DRIP). With a DRIP, dividends paid out by a company or fund are automatically used to purchase new shares. When this happens, investors can end up with fractional stock. Let’s say you owned 200 shares of a company and the annual dividend payout was $0.30 per share. You’d be entitled to dividends worth $60 this year. If the stock is priced at $40, the dividends would automatically buy one and a half shares. You’d end up owning 201 ½ shares of stock.
• Mergers and acquisitions. When companies merge or are acquired, their stock may be exchanged for new shares. They generally use a ratio to combine stocks from different companies, meaning five shares of Company A might become three share of Company B. This process could result in fractional shares.

Many online brokerage platforms, such as eToro, Superhero, Moomoo and Sharesies offer fractional shares. A few robo-advisors purchase fractional shares for your portfolio.

Depending on the brokerage, you might need to buy at least $1 or up to $5 worth of fractional stock. In addition, not all stocks or ETFs offered for sale on an investing platform are available as fractional shares. If you want to buy fractional shares, compare online brokerages and investing apps before you sign up to ensure the one you choose allows it. Around half of the platforms featured in our pick of the best share trading platform for beginners allow you to purchase fractional shares.

Finally, make sure there aren’t additional commissions or fees for fractional share investing. Since fractional share buys are usually made in smaller dollar amounts, fees could drastically eat into your returns.

• Start investing with smaller amounts of money. If you’re just starting out and don’t have a large balance of money to invest, fractional shares can make a big difference. They let you get into the market immediately and start benefiting from compounding returns sooner.
• Diversify your portfolio without spending a fortune. One of the basic rules of portfolio construction is diversification. By owning a variety of different stocks and especially ETFs, you can reduce the likelihood that you lose money if any one stock tanks. Because fractional investing lets you buy many shares for $1 to $5, you may be able to buy broader selections of stocks than you could otherwise.
• Better dollar cost averaging options. With dollar cost averaging, you invest a set amount of money regularly. Over time, this may let you pay less per share than you would if you bought all of your shares at once. Because dollar cost averaging is focused on a consistent dollar amount, not a consistent share amount, it works better when you’re able to invest that full amount. Otherwise, some of your money has to sit in a cash account before you have enough to buy a full share.

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• Limited stock options: Not every stock is available for fractional investing. You might not be able to choose from as many companies as you could if you bought whole shares.
• Liquidity: You might not have immediate asset liquidity with your fractional shares. Fractional shares may not trade as frequently or as rapidly as whole shares. Brokers wait to accumulate enough fractional orders to buy whole shares, which may reduce the speed of filling orders. Also, not every fractional share is in high demand, so it can sometimes take longer to buy or sell your fractional shares.
• Shareholder rights: Depending on your broker, you may not be able to exercise voting rights on company matters if you own less than a whole share. For example, eToro does not give owners of fractional shares voting rights, and organises an electronic proxy vote for company meetings.
• Transfers: Some brokers won’t let you transfer fractional shares to other brokers. Instead, they transfer any full shares and sell any fractional shares to give you as cash. This may be merely an inconvenience, as you may be able to repurchase shares quickly at your new brokerage. That said, liquidating fractional shares may have unintended tax consequences if your fractional shares have increased in value.
• Dividends: Just as fractional stocks represent a portion of a full share, if you own fractional shares, you’ll get the portions of stocks’ dividends. So, if a payout is $0.50 per share, and you have half of a share, you’ll receive $0.25 as a payout.

Before purchasing fractional shares, make sure you understand your brokerage’s fractional share policies and fully understand the pros and cons of buying portions of shares.