What are fractional shares and how do they benefit small investors?

Fractional trading | Image Resource: interactivebrokers.com

The prices of the shares of big names come with a price tag. If you do not have enough money to buy a whole share then you can buy a portion of the share. Fractional shares are a part of the whole share and allow you to buy expensive shares and ETFs.

You can buy fractional shares for an amount as low as Rs. 1. Fractional shares are a boon for new investors as it helps them to diversify their portfolio by investing in companies that otherwise may be out of reach.

There are many reasons to buy fractional shares. You may not have enough money to buy a full share or you may want to invest a fixed amount of money rather than buy a round number of shares. 

How fractional shares are formed?

Fractional shares are a new development previously it was impossible to buy less than a share. You can own fractional in the following ways:

A company splits its stocks and agrees to give the shareholders an additional share of stocks. For example, in a 3:2 stock split the shareholders will receive 3 shares for every two shares. If a shareholder has 15 shares then the count would be 22½ shares. This extra half-share is the fractional share.

In a Dividend Reinvestment Plan (DRIP) the company paying the dividend allows the shareholders to reinvest their amount to buy some more of the same shares. When the amount is reinvested it leads to fractional shares.

When the companies merge or are acquired their stocks are exchanged for new shares. Generally, a ratio is used to combine the stocks from different companies. This process results in fractional shares.

Benefits of fractional shares

If you are just starting to invest in the stock market and do not have a large amount of money to invest then you can buy fractional shares. You can get into the market immediately and start getting the benefits of compounding.

It is important to diversify your investment portfolio. By investing in a variety of stocks you can reduce the likelihood of losing your money if one stock goes down. Fractional shares allow you to buy many shares for a lesser amount therefore you can buy a broader section of stocks.

You may be investing a fixed amount of money regularly with dollar cost averaging. Fractional trading allows you to buy shares rather than put the money in the bank.