Mar 8, 2024 - Last Updated: Mar 11, 2024
In this article, we will explain the basics of fractional shares — what they are, their benefits and disadvantages, and how they are traded. Additionally, we’ll highlight an upcoming fractional trading opportunity: fixed income.
Contents:
- What are Fractional Shares?
- Benefits of Fractional Share Trading
- Disadvantages of Fractional Share Trading
- How Does Fractional Share Trading Work?
- Future Fractional Trading: Fixed Income
What are Fractional Shares?
A fractional share is exactly what its name implies: a portion (or fraction) of a company stock that is less than one full share.
Unlike traditional whole share trading, fractional shares allow people to make investments based upon a specific dollar amount, instead of an individual stock’s price. For example, through fractional share trading, you can invest $50 in a stock whose price per share is $100; in turn, you would be granted ownership of half a share of stock.
While fractional trading has existed since 1999, their use was typically limited to dividend reinvestment programs (DRIPs), company mergers and acquisitions, and stock splits. In the late 2010s, however, firms like Apex Fintech Solutions began introducing technology that enabled fractional trading capabilities for brokerages and robo-advisors.1 In the wake of industry-wide innovation, fractional trading has since become a widely accessible and popular investment strategy for retail investors.
Notably, in recent years, firms have begun exploring other asset classes, such as fractional fixed income trading.
Examples of Fractional Shares
Stocks & Equities
A stock, or equity, is a financial security representative of a share in company ownership. Typically, stock ownership provides investors with the ability to vote in shareholder meetings and the right to a share of company profits via dividend payments.
Typically bought and sold on stock exchanges, this type of security can be traded as whole and fractional shares. Importantly, however, the dividend amount an investor receives will be proportionate to their share of ownership.
So, for example, if you invest $40 in a $200-per-share stock with a quarterly dividend of $1, your payout will be approximately 20 cents.
Exchange-Traded Funds (ETF)
A type of index fund, ETFs are pooled securities that can allow investors a chance to diversify their portfolios. Like stocks and equities, they can be traded throughout the day and are available through fractional shares.
DRIPs, Stock Splits, and Mergers
- DRIPs (dividend reinvestment programs) — an investment strategy where an investor’s dividends are automatically reinvested into company stock, occasionally resulting in fractional shares.
- Stock Splits — an increase in a company’s outstanding shares to boost their stock’s liquidity. Typically executed on a 2-for-1 or 3-for-1 ratio, this tactic often creates fractional shares for investors.
- Reverse Splits — a decrease in a company’s outstanding shares that produces fractional shares at a pre-defined ratio. With a 1-for-10 split, for example, investors receive one share for every 10 they own. If someone has only 9 shares, they will receive 0.9 in fractional shares.
- Merger and Acquisition — the combining of company stocks on a pre-defined ratio, due to a merger or acquisition. When stocks are exchanged for new shares, these ratios could cause fractional shares.
Benefits of Fractional Share Trading
Increased Accessibility
Without fractional shares, investors could be limited by their ability to afford a stock’s whole share price. Fractional trading, however, allows investors to buy portions of shares, effectively reducing barriers of entry to higher-price stocks.
With a lower entry point, new investors have the opportunity to start benefiting from compounding returns more easily, which in turn can be reinvested to further increase the number of shares they own.
Portfolio Diversification
Naturally, fractional stocks can also enable investors to build diversified portfolios at a more affordable rate. Specifically, individuals can choose to invest a set percentage of their funds in multiple different companies and industries, regardless of their listed stock price.
For example, if you had $10,000, you could choose to invest 5% of your funding into 20 different companies across multiple industries — giving you a more diverse portfolio without purchasing whole shares.
Maximized Investment Opportunities
Fractional shares may also offer opportunities to increase the effectiveness of common investment strategies, such as dollar-cost averaging — an approach where investors contribute a set amount on a regular basis, regardless of a security’s price.
Although popular, this strategy may have less consistent results than desired. Due to the nature of whole shares, it is unlikely that investors are purchasing the same amount of stock with every contribution. Fractional shares can help solve this limitation.
“Dollar-cost averaging with fractional shares allows you to invest the full amount of the cash you are putting into your investment account on a weekly or monthly basis,” says Michael Pappis, a Financial Wellness Coach at NewRetirement. “Whereas without fractional shares, some of your money may have been sitting in cash before there was enough to purchase a full share.”2
As an example, if you were to contribute $200 per month and your targeted stock was trading at $80, you would only be able to buy two whole shares. With fractional stocks, however, your remaining $40 would also be invested, instead of returning to your brokerage account.
Disadvantages of Fractional Share Trading
As all investors know, no strategy is without its disadvantages. Along with potential fees and tax considerations, some downsides of fractional shares include:
Selection Limitations
Currently, every online brokerage creates their own catalogue of stocks that are available for fractional share investing. As such, investors will be limited to their broker’s offerings — meaning there may be fewer fractional opportunities than whole ones.
These limitations tend to be based on fractional share types. For example, some firms may offer ETFs, while others may not; some may offer fractional shares for a company stock, while others may not.
For investors who want to buy fractional shares, this means that they should open accounts with brokerages whose offerings align with their specific needs and goals.
Brokerage Transfers
Currently, there are no industry standards that establish guidelines for the size of a fractional share — or require brokers to offer fractional share trading in the first place. As a result, transferring fractional stocks from one broker to another can be significantly more difficult than the traditional process associated with whole shares.
For example, some brokers may prohibit their clients from directly transferring fractional shares to another firm. Instead, they may transfer only whole shares and sell the remaining fractional shares, then transfer the resulting cash.
Depending on the situation, this roadblock may be a minor inconvenience, as investors may be able to repurchase those fractional stocks at their new brokerage. Liquidating fractional shares may come with unintended consequences, however, such as tax implications, broker fees, and other unforeseen costs.
Of course, two brokerages may not even offer the same fractional stocks, making direct and indirect transfers impossible.
Shareholder Voting Rights
Currently, brokerages determine the voting rights of fractional shareholders, which may limit an investor’s ability to vote on company matters if they own less than one share.
Some brokerages only offer voting rights to investors that own full shares — e.g., with rules stating “If you own fractional shares in a company, you will not have voting rights. If your investment gives voting rights, you get them once you own a full share.”3
Alternatively, other brokerages provide fractional shareholders with proxy voting rights, aggregating votes into whole shares and reporting them to the issuers.4
How Does Fractional Share Trading Work?
Unlike whole shares, fractional stocks are not traded on the open market. Instead, the only way to buy or sell them is through financial advisors and brokerages, which can group fractional shares together to attain a whole share. Today, these trades are primarily made through an online broker, a financial advisor, or a robo-advisor.
Given its popularity, fractional trading is currently offered by most major online brokerages, including Webull, Fidelity, and Charles Schwab. Investment apps, financial advisors, and robo-advisors, like SoFi Invest and Betterment, also offer fractional shares.
Naturally, the investment experience is largely dependent on the brokerage, their guidelines, and their offerings. Common differences include:
- Available fractional share offerings, including ETFs and stocks
- Additional fees related to fractional shares
- Real-time trading capabilities
- Block-trading vs bulk-trading processes
- Proxy voting rights
Future Fractional Trading: Fixed Income
Following the success of fractional shares, some fintech firms are exploring similar investment opportunities for other asset classes.
Leading the way, Apex Fintech Solutions (“Apex”) announced in December 2023 the pending launch of the industry’s first fractional fixed income investment platform.* The platform will enable fintechs and traditional brokers to provide their clients with an easier, cost-effective fractional fixed income investment experience.
Upon the release of Apex’s platform, investors will be able to purchase a variety of fractional fixed income products, including certificates of deposit (CDs) and government, corporate, and municipal bonds.
To learn more about Apex’s fractional fixed income investment platform, click here.
Footnotes & Disclaimers
1 Britton, Diana. “Apex Clearing Brings Fractional Shares to Discount Brokerages.” WealthManagement.com. 24 Oct. 2018, https://www.wealthmanagement.com/technology/apex-clearing-brings-fractional-shares-discount-brokerages
2 Davis, Chris. “Fractional Shares: What They Are and Where to Buy Them.” NerdWallet (blog), 28 Feb. 2024, http://nerdwallet.com/article/investing/fractional-shares.
3 Team Stash. “Find Out About Shareholder Voting Rights.” Learn (blog). Stash. 7 Dec. 2023, https://www.stash.com/learn/find-out-about-shareholder-voting-rights/.
4 “Fractional Shares.” Robinhood Support. https://robinhood.com/us/en/support/articles/fractional-shares/.
* Fractional fixed income investing is not currently available from Apex Clearing Corporation. Please contact your Apex representative for additional details including when and whether fractional fixed income investing will be available in your country, or to learn more about upcoming products and services. Certain fractional fixed income service features may not be available for all fixed income investments.
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