Fractional Shares: What Are They and How Do They Work?
Posted by Rashmi Dey on April 3rd, 2021
What if we say that you can receive maximum benefits from shares of Apple without even buying a whole share of stock at once? If you have had an eye on a pricey stock that you can't afford to buy, then there is a term called fractional investing which allows you to purchase a share of that stock at once.
Still, get confused? Don't worry, here in this article, we will explain what is a fractional share and how do they work?
Fractional share trading has received wide momentum over a few years. This is because it is recognized as an important innovation for digital wealth management and online investing industries. When you think of an expensive share to buy such as Apple, you might get scared off by the perception that you require a lot of money, let's say a thousand of dollars right from the beginning. However, this is not the case - in fact, sometimes you can get involved without even purchasing a whole stock at once.
Needless to say, some stocks are too precious to buy such as Apple. When you think of a stock like Apple, you likely think of a single stock, which is not possible for many investors to buy. In fractional share investing, you can purchase a share as little as or of stock in a single trade.
Let’s understand the concept of fractional stock trading:
What Are Fractional Shares?
The method of buying shares is known as fractional share investing. Fractional shares are simply a piece of a share from a stock that allows people to invest in pricey stocks that they otherwise would not be able to buy hence increasing opportunities for many investors. For instance, consider Amazon who's currently selling for $ 3,116. Buying of fractional shares becomes extremely useful to buy such a high valued stock. As such stocks recognized as huge priced stocks, buying fractions of these stocks start making more sense than before. However, for penny stocks, fractional shares might not make that much sense.
Dollar Based Investing
Fractional investing is also known as Dollar based investing and is often the result of dividend investment plans, corporate activities, similar corporate activities. Historically, it was extremely difficult to acquire fractional shares through the traditional financial market since you couldn't buy or sell in the stock market. However, with the successful efforts of stock brokers such as Swastika Investmart, investors can purchase pricey shares in the stock market.
Benefits of Fractional Shares
There are bountiful benefits of investing in fractional shares. As the name suggests, fraction shares mean a fraction of a full share. Needless to say, the value of fraction share is always less than the value of a full share, it requires a minimum investment amount. For example: let’s assume a company has a share price of 00. Many investors can’t buy a single share but they can buy as little as and own a 1% of a share.
One of the major benefits of fractional investors is that it allows new investors to purchase the shares of a highly worthy company. Also, it allows investors to invest in expensive stocks with minimum risks. Without using fraction shares, it would be difficult for an average investor to build a strong portfolio such as Amazon, Tesla, Google, Netflix as each share of these stocks would cost hundreds of dollars.
Because of fractional investing, many investors can invest in their favorite stocks. These companies are equally distributed to the fraction of the share that you own.
Formation of Fractional Shares
As mentioned earlier, fractional shares consisted of several corporate activities such as Merger and Acquisition, stock splits and DRIPs. Let's take a quick tour of these terms:
Merger And Acquisition
Fractional shares are often created from merger and acquisition to form a new stock. For instance, if you purchase a share of 5 of company B which is ready to merge with company A and convert the shares of 1 for 3 in the new company C, then you are available with 1.67 shares of company C after the merger.
When a company declares a stock split that means the number of shares of that company increases, however, the market capitalization of that company remains the same. Existing shares split but the underlying value of that company remains the same. A stock split is done to make liquidity and to make shares affordable to all types of investors who could not buy the shares due to heavy share prices.
Dividend Reinvestment Plans
DRIPs are a fractional part as the brokerage firms allow investors to use the dividend payout so as to buy more shares of the same stock. As the dividend is used to purchase the same stock, some of it may not buy a full share, which in turn makes it a fractional share.
Fractional shares allow many investors to buy shares of expensive companies that interest you, especially when your funds are limited or the company is out of your reach. Earlier, fractional trading was quite difficult as many investors couldn't afford to buy the stocks, also they used to find it hard to reach these stocks.
Now, many brokerage and trading platforms allow fractional investing such as Swastika Investmart. The leading brokerage company allow investors to buy shares of your favorite companies for as low as . To get a detailed insight into fraction trading, kindly visit at https://international.swastika.co.in/
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About the AuthorRashmi Dey
Joined: November 26th, 2020
Articles Posted: 9
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