Fractional shares are a type of investment that could help you access the stock market at a lower cost.
Here, we explain how they work and whether they’re worth investing in.
What are fractional shares?
Investors can buy parts of a company, known as shares, on the stock market. A fractional share is simply a fraction of a whole share. For example, if a whole share was split into thirds, there would be three fractional shares.
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How are fractional shares created?
Fractional shares are created in several ways:
Dividend reinvestment plans: When an investor agrees that a broker will re-invest their dividends to buy more shares. Re-investing the dividends can result in the purchasing of parts of shares.
Stock splits: This is when a share is divided into smaller chunks. The overall value of the shares remains the same. Stock splits can be reversed if a company wants to consolidate the number of existing shares into fewer stocks.
Mergers and acquisitions: Fractions of shares can be created when two companies merge or one company buys another. To ensure that one share in one company is equal in value to one share in the other, stock splits may be required.
Where can you buy fractional shares?
Fractional shares are most commonly offered by stock trading platforms. There are a growing number of companies available, including eToro, Freetrade, Trading 212, Revolut and Wombat.
A limited number of mainstream brokers also offer these types of investments. In fact, Interactive Brokers became the first major investment firm to offer fractional shares trading in November 2019.
You can also invest in these shares through exchange-traded funds (ETFs) on platforms like Wealthsimple.
How do you sell fractional shares?
Fractional shares can be sold through the broker or stock trading platform that you bought them. When you sell your fraction of a share, it’s joined with others until a whole share is created.
The length of time it takes to sell you stocks varies on demand in the marketplace. High demand for your shares means that they will sell faster, while low demand could mean they take longer to sell.
Can you get dividends from fractional shares?
If you buy fractional shares in a company that pays dividends, you’ll be entitled to a portion of the payments.
A dividend is a sum of money paid to shareholders of a company from the profits they make. Your dividends are calculated based on the portion of a share you own.
For example, let’s say a company pays its shareholders £10 in dividends annually for each share they own. If you own half a share, you’ll be entitled to 50% of the dividend, which is £5 each year.
Are they worth investing in?
Overall, fractional shares can be a great way for beginners to experiment with the stock market. They are low-cost investments so you don’t need a lot of money to get started.
Investors get the chance to buy shares in large companies like Apple, Facebook and Netflix which may otherwise have been too expensive.
The main downside to this type of investment is that you could rack up a lot of fees. Some brokers charge a commission each time you buy stocks. So, if you buy small shares in lots of companies, these fees could eat into your investment return.
As with any investment, it’s important to do your research before parting with your cash. Check out our comprehensive investment guide for more tips and advice.
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