A portion of an equity share is called a fractional share and is less than one full share. Fractional shares cannot be sold in the open share market and the only way to sell them is through major brokerage firms.
Fractional shares form due to many reasons like stock splits, mergers and acquisitions, dollar-cost-averaging, dividend reinvestment plans and capital gains. They are not available from the share market.
If an investor is interested in buying stocks of top companies but has only Rs. 1000 to invest. The investor does not have enough money to buy a whole share. The investor can buy a fractional share with the same amount. For example, the investor may buy ⅓ of the share.
Fractional Trading
How do fractional shares form?
Fractional shares form due to the following corporate actions:
Stock splits do not always lead to an even number of shares. A 3 - 2 stock split will create three shares for every two shares the investors own. If an investor has an odd number of shares then it would lead to a fractional share. If the investor has 3 shares then it will become 4½, 5 shares will become 7½ and so on.
A Dividend Reinvestment Plan (DRIP) is a plan in which the company offering the dividend allows the investors to use it to buy more of the same shares. The amount ‘drips’ back to purchase more shares and does not always lead to a whole share. The fractional share forms this way. Simillarly, capital gains and dollar-cost-averaging also lead to the formation of fractional shares.
In mergers and acquisitions, the companies combine stocks using a predetermined ratio and this leads to the formation of fractional shares for the shareholders.
Trading online in fractional shares
Now you can invest in the world’s best stocks due to fractional shares as they are within easy reach. There are apps provided by brokers that allow you to buy any stock with any amount. You can buy as much as your budget allows though the stocks may be expensive.
The apps use AI algorithms to recommend stocks to you based on your preferences. You can do fractional trading using the apps and buy the shares of top companies for an amount as small as Rs. 1.
The apps allow you to invest in a safe, secure and compliant manner. The apps use state-of-the-art security features and you can trade without any worry.