What is a Fractional Share?
A fractional share is less than one whole share of a stock, which allows investment based on a dollar amount rather than the price of a share.
This could mean that the investor will have less than one share, a whole share, or more than one share after the desired dollar amount is invested.
How do Fractional Shares Work?
Aside from purchasing fractional shares, different events such as stock splits and dividend reinvestment plans (also known as DRIPs) can also lead to investors having fractional shares in their account.
Only a few brokerage firms in Canada allow traders to purchase fractional shares.
The practice of offering fractional shares makes the stock market more accessible to different types of traders.
While one may not be able to afford Google at over $2,500 per share, fractional trading allows anyone to become a shareholder with just a few dollars.
2 Platforms to Buy Fractional Shares in Canada
One of the first investment platforms to offer fractional share trading, Interactive Brokers is a great platform for intermediate and advanced traders with a wide variety of tools offered.
- Has a large selection of investment options.
- Advanced tools and strong research capabilities.
- Platform can be a bit much for beginners.
Wealthsimple Trade offers fractional share trading for fourteen different companies including Google, Amazon, and other giants whose shares are usually out of reach for small investors.
- Commission-free trading.
- High quality educational material is provided to users.
- Fractional trading options are limited.
Pros of Fractional Shares
- Access companies with high share prices. Large companies like Google have shares worth hundreds or thousands of dollars per share. Fractional share trading offers the ability to invest in the company without having to overextend finances to purchase a whole share.
- Easier to balance a portfolio. Since larger companies are generally more stable than smaller or riskier ones, fractional shares allow someone without resources to buy a whole share of a larger, more stable company to balance their portfolio.
- Invest exact dollar amounts. This makes it easier to dollar cost average into the market and invest a precise dollar amount, rather than a share amount which could change its dollar value at each buy.
Cons of Fractional Shares
- Each broker has its own terms for fractional share trading. It’s important to understand each broker’s terms and rules for fractional trading before moving forward. Every broker has different rules about buy and sell orders, paying dividends, and voting rights.
- Commission-based fees. Even though fractional trading makes more companies accessible to everyday investors, there are drawbacks to fractional share trading. One of the big ones is commission-based fees that are charged per transaction. Large numbers of fractional share transactions can quickly rack up the fees.
Frequently Asked Questions
- Are fractional shares a good idea?
The benefits of fractional shares are extensive, while the drawbacks are relatively negligible. Avoiding extra fees for fractional shares can be avoided by selecting a broker that doesn’t charge commissions per transaction. Fractional shares allow one to invest using specific dollar amounts rather than the share quantity.
- What is an example of fractional shares?
If a company does a stock split, there is a chance that shareholders will not receive an even number of shares after the split. For example, if someone owns 11 shares of a company and it does a 3:2 stock split, they would end up with 16.5 shares. That extra half a share is considered a fractional share.
- How do you sell fractional shares?
Selling a fractional share is the same as selling a whole share, however only large brokerage firms offer that service. There is a sell order, and the brokerage firm holds on to the fractional share until another fractional share executes a sell order. The brokerage combines the shares and sells them as a whole share.
- Do fractional shares pay dividends?
If the stock for the fractional shares pays dividends, the fractional shares will also pay dividends equal to the proportion owned. If only half a share from a company that pays dividends is owned, the owner will only receive half of the dividend payout.