Fractional Shares Investing: A Guide to Investing in Fractional Shares

Let’s first understand in detail of "fractional shares".

A fractional share is a portion of a stock that is less than one full share and is basically a result of corporate actions such as stock splits’ or bonus shares' that cannot be traded in the market and cannot be bought and sold in the market.

For essence, if an investor holds 9 shares of XYZ Ltd. and the company declares a 3-for-2 stock split, then the investor will be eligible to receive extra shares of 4.5, which would increase their total number of 13.5 shares. However, it is common for companies to round up to the nearest whole number of shares in such scenarios, so that investors might end up with 14 shares.
Fraction shares also arise when a company merges with another company and the share swap ratio is absolutely unequal to the number of shares held by the investor. In this specific time, investors are entitled to receive fractional shares of the new company.
Let’s assume, 

An individual holds 29 shares of ABC Ltd., which has recently merged with XYZ Ltd. Assuming XYZ Ltd. offers one stock for every five stocks held by ABC Ltd., In this particular case, the individual would only receive 5 shares, that is, 5*5=25, of the new company XYZ, leaving them with (29-25) 4 shares of the old company ABC. Consequently, the investor would be entitled to a fractional share of 0.8 (4 shares/5=0.8) of XYZ.

What are the advantages?

There are several advantages for small investors, apart from many others. These are as follows:

• Lower capital for investing: This sort of small part of investments by small players or even new participants will get adequate opportunity to deploy their initial investments to have the benefit of compounding at an early stage.

• Diversification opportunity: Despite having a smaller investible amount, the investors will get a diversification opportunity, which will help them reduce their portfolio risk during a market blood bath.

• Dollar cost averaging opportunity: It involves regular investment through regular intervals, which will potentially lead to an average price over time. This dollar cost averaging is a crucial investment strategy.

Conclusion: Smaller investors get ample opportunity from fractional shares, which provide for building wealth even with limited capital. This facilitates diversification to mitigate the risk of hard-earned money that’s been invested.

Frequently Asked Questions (F.A.Q)

Are fractional shares a good idea?

Yes, it certainly gives an advantage to investors who have smaller capital sizes. Additionally, provide diversification benefits to reduce portfolio risk.

Do you still get dividends on fractional shares?

A good dividend-paying stock would always be committed to distributing dividends on time, but it solely depends on your research whether you invest in a dividend-paying stock or not.

Are fractional shares good for beginners?

This sort of small part of investments by small players or even new participants will get adequate opportunity to deploy their initial investments to have the benefit of compounding at an early stage. Despite having a smaller investable amount, the investors will get a diversification opportunity, which will help them reduce their portfolio risk during a market blood bath. It involves regular investment at regular intervals, which will potentially lead to an average price over time. This dollar cost averaging is a crucial investment strategy.