Have you ever looked at the rising price of a stock and regretted not investing in it? No doubt, buying these high-priced stocks feels out of reach. But what if you can own just a small fraction of them? This is where fractional shares come in. They let you own a part of any company, no matter the share price.
In this article, we will discuss in detail what fraction shares are, how they work, and their types.
What is a Fractional Share and How Does it Work?
You can think of a fractional share as a piece of a single full share of a particular stock. It allows you to buy $5, $50, or $500 worth of any company. When investing in fractional shares, you are not bound by the full share price. It means if a stock costs $3,000 per share, you can still invest. You can even own 1/100th of that share for just $30.
To buy a fractional share, you go to your broker app and pick the stock you want. Instead of purchasing shares, you type in the dollar amount you want to invest. The broker then uses your cash to buy a fraction of a particular share for you.
After this, your account will show that you own a fraction share, and its value will rise and fall with the full share price. However, for the best trading experience, you must choose a reliable and reputable platform for investing, such as SoFi.
How are Fractional Shares Created?
You might wonder how a broker can split a share. They do it in two main ways. The first and most common way is to split the share. When you and other investors put in orders for bits of stock, the broker holds this cash and, after some time, buys whole shares on the open market. These shares are held in the broker’s name, and they use their own system to track who owns which piece.
The second way to create fractional shares is through corporate actions, such as an uneven stock split. For example, in a merger, the share exchange ratio might result in some shareholders getting a partial share. In the past, these were often sold off for cash. And now, brokers can hold these fragments as fractional shares in your account.
How Dividends Work with Fractional Shares?
The dividends work with fractional shares exactly as they should. When the company you own a piece of pays a dividend, you get your fair share. If a full share pays a $1 dividend, and you own half a share, you will get a $0.50 dividend.
In fractional shares, the dividend amount is perfectly proportional to your ownership stake. Your broker will automatically credit this smaller dividend amount to your cash account. You can then use it to spend, save, or reinvest. You can even buy a fractional share of another successful company for this amount.
