Do you want to invest in Apple or Tesla stock, but your investment budget is too low for them? Here comes the solution: Fractional Shares. In the following article, we will briefly talk about what is fractional shares and how they work.
Understanding Fractional Shares
Fractional shares help you purchase a portion of the stock, meanwhile allowing you to diversify your portfolio with a small budget. When you get a fractional share, you own a fraction of one instead of owning one whole stock. Let’s say you want to own Berkshire Hathaway stock, but it is too expensive for you, and you do not want to invest all your savings in a single company. Then fractional shares come to help, and they are available through several online brokerages. In addition, fractional shares could be an affordable alternative for beginners in the stock investment world.
How Do They Work?
When you own a fraction of a stock, you are the same as the investor who purchases a whole share. You obtain the same percentage profits and benefits from stock ownership. Moreover, you are also exposed to the same risk of loss.
If you buy fractional shares of a dividend-paying stock, you will get a dividend based on the number of shares you possess, just like any other investor. If stockholders receive a $1 dividend for each share owned and you own half of a share, you will receive $0.50.
You can sell fractional shares in the same way you can sell a whole stock you hold. If you purchased half of the share through your brokerage and want to sell it, execute a sell order with the same broker and cash out your holdings.
Suppose ABC is a fictional business with a share price of $100. You decide to invest $50 and become the happy owner of half (0.5) of ABC shares. You would earn $0.50 if ABC declared a $1 dividend. If the company’s share price increases by 10% from $100 to $110 per share, your ownership will rise by 10% from $50 to $55.
Using our initial share price of $100, if firm ABC performs a 2:1 stock split, you would now possess one whole share for $50, and the $100 shareowner would have two shares at $50 each. This does not affect the full amount invested because fractional share investors still have $50, and whole share investors still have a total of $100.
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