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How Fractional Shares Benefit Investors

InvestorEducation / Learn to Trade Dec 29, 2018 - 02:34 PM GMT

By: Sumeet_Manhas

InvestorEducation Have you ever wondered what you would do with the small balance on your gift balance because there is nothing you can afford and buy with it? A similar issue is experienced when buying investments like stocks and ETF in whole share quantities. Fractional shares give investors flexibility in two main areas; to put all the available cash for immediate work and buy fractions of stock in companies with a high price per share.

There are sites where you can specify the number of fractional shares you intend to trade. Then, the online calculator helps you determine the number of shares you can actually trade. Shares are whole units which are offered by companies as stock. These stocks are then traded on the open market in full share quantities. Most brokers discourage investors from buying and selling stock in whole share quantities.


The Difference between Fractional Shares and Whole Shares

Corporate actions like stock splits could cause you to wind up with fractional shares even if you only trade stocks in whole shares. Fractional shares are partial shares that are equal to less than one share. These fractions can be visualized like the fragments that make up an orange. If an orange has 10 segments, each section represents a portion of the whole orange. Therefore an investor might receive a fractional share of a company as a result of a corporate action. For instance, if you own 725 shares of a company and the company announces a 3-for-2 stock split, then for every 2 shares you own prior to the split, you will receive 3 shares afterward.

Brokers have varying policies and there are some who will not allow you to trade fractional shares. They will allow you to replace the percentage of share you are entitled to with its cash value. These kinds of shares are flexible and efficient. Most of the brokerage firms let investors take full advantage of trading fractional shares. When you place an order with a brokerage firm you just set the dollar amount you wish to purchase. The platform will then allocate the number of shares to you.

How it Works From the Brokerage Side

 In the past, investing was relegated to whole units. However, now it is possible to divide a single share or an asset and distributed among purchasers. All you have to do is set the amount in dollars you wish to invest and then the broker will invest that amount.

Fractional shares were initially used as parts of dividend reinvestments plans. A company could have the power to reinvest the payment of a dividend paid out to you into fractional shares. There was no need for brokers and this kept the amount low.

The next phase of trading was the dollar cost averaging. This is when you buy a fixed dollar amount of a stock despite the price. These plans are set on schedules with specific amounts of money invested at predetermined times. In essence, you only receive what you have paid for.

There is an increasing number of brokerage platforms that have realized the importance of fractional shares investing. Fractional shares are important for robo or digital advisors. The most advanced digital trading platforms make room for fractional investing.


Reasons for Digital Advisors to Allow Fractional Investing

  1. Great for diversification: even those who have just a small amount to invest can still benefit from fractional shares as it allows for easy diversification. Even if you invest cheaper stocks, you can still find at least more than 10 or more attractive stocks. You can diversify your money and invest exactly where you want. When it comes to digital investing, there is lowered risk and an increased profit potential as a result of this diversification.
  2. Gives investors flexibility: if the only option you had when it comes to investing was to buy whole shares, you would be forced to set aside money to purchase those shares at a targeted price. However, fractional shares allow you to set aside a budget.
  3. Put all of your money to use: you do not have to set aside a lot of money so that you can afford to buy a whole share. For instance, if you want to buy stocks from a prestigious company but you only have $100, you can buy a fraction of its share. You do not have to wait until you save a lot of money.
  4. It is great for new investors: there is another great benefit that comes with fractional shares. You can get going even if you are just starting out as an investor and don’t have a lot of money. As long as you have formulated numerous strategies and have carefully studied stock trading, you can invest like a pro.

Where Partial Shares Come From

It is common to invest in stocks after you have a formal an agreement to reinvest the dividends a company has paid out. However, there is no guarantee that these paid dividends will permit you to purchase the equal amount of stock.

Sometimes companies will issue a stock split, thereby replacing outstanding shares with bigger shares. The same thing happens when companies merge. If these transactions result in some of your shares replaced with new shares, you come up with partial shares. There are sometimes when companies will try to avoid this issue by issuing cash at the current market value instead of partial shares.

There are some brokerage firms that will encourage you to deal in partial shares of other investments like Cryptocurrencies such as Bitcoin. This makes it possible for smaller investors to find ways to put money into their stocks or any other investments without needing to buy the full shares.

Just like any other investment decision, it is advisable to take into account the total commission you will need to pay to buy and sell the shares. See if it makes sense or it would be wise to make relatively smaller investments.

By Sumeet Manhas

© 2018 Copyright Sumeet Manhas - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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