Fractional shares represent a new form of shares that allows individuals to purchase slices of single company stocks. Instead of requiring whole share purchases, fractions enable retail investors to participate in markets previously inaccessible to those with limited capital. This innovation stands to transform equity investing.
What Are Fractional Shares?
Traditionally, investors could only trade whole unit shares of a company. For high-value stocks like Amazon or Tesla, the substantial per-share price excluded many smaller investors. Fractional shares solve this by dividing single shares into affordable fragments.
For example, an investor can purchase 0.25 shares of a stock trading at $200 per share for just $50. These fractions are facilitated by brokerages, who bundle together fractional orders until they have enough for whole shares. The brokers then hold the shares and credit investor accounts proportionately.
So if Brokerage A receives orders for 0.1 shares of Stock Z from 10 different clients, they will combine the orders and purchase 1 whole share of Stock Z. Each fractional owner is allocated their portion of the whole share.
The Mechanics Behind Fractional Shares
To enable fractional share trading, brokerages use aggregation models. Under this model, the brokerage aggregates fractional orders over a period until they reach whole share quantities. They then execute bulk trades to acquire whole shares on behalf of the fractional owners.
The key benefit of aggregation is consolidated purchasing power. By combining small orders into bulk trades, brokerages can secure institutional-level discounts and favourable execution prices. This passes cost savings down to the fractional investors.
Once whole shares are purchased, they are held in the brokerage’s master account. However, ownership is credited to individual fractional holders proportionately. The brokerage handles all dividends, stock splits, and other payouts on behalf of the fractional owners.
The Benefits of Buying Fractional Shares
Financial Inclusion
Fractional shares democratise investing by removing barriers such as high share costs and minimum capital requirements.
Cost Efficiency
The ability to buy a portion of a high-priced share is far more cost-effective than purchasing an entire unit. For instance, acquiring a 0.25 share of Booking Holdings for under $900 is more feasible than spending $3,000+ on a whole share.
Compounding Growth
Fractional owners are entitled to dividends proportional to their share amount. Many brokerages offer automated dividend reinvestment, using the payouts to purchase additional fractional shares. This compounding amplifies returns over time.
Introducing New Investors
By providing an easy, accessible entry point, fractional shares are an ideal way to get beginners started in equity markets. The bite-sized investment sizes and fractional versions of popular stocks cater perfectly to first-time investors.
Getting Started with Fractional Shares
Leading brokerage platforms like Fidelity, Robinhood, Interactive Brokers and tastytrading offer fractional share investing in the U.S.
Here in the UK, you can buy fractional shares on investment platforms such as eToro. Trading 212 and Freetrade. With the right broker, almost any portfolio or budget can now accommodate fractional shares.
Fractional investing has unlocked the world’s most valuable companies for millions more people. While not without some limitations, fractional shares may profoundly transform equity investing accessibility. The slivers once considered too small for Wall Street now offer Main Street the chance to share in its returns.
Your capital is at risk.
