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What Are Fractional Shares?

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5 mins read May 17, 2023
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In today's global economy, investing in the stock market has become essential for wealth creation and financial security. However, the cost of purchasing entire shares of high-performing stocks can be a significant barrier to entry for many people, especially in emerging markets like Africa. This is where fractional shares come into play, making stock market investing more affordable and accessible for everyone. 

In this article, we will explore the concept of fractional investing, particularly in relation to stocks, and how it reshapes investment and opens up opportunities for many young people.

What Are Fractional Shares?

Shares are units of equity owned by an individual or moral person in a company. 

On the other hand, fractional shares are simply smaller portions of a single share in a publicly traded company. Instead of purchasing an entire share, investors can buy a fraction or a percentage of a share. 

This innovative approach to investing allows individuals to own equity in high-valued companies, such as Amazon, Apple, or Tesla, without having to pay the full share price.

This practice is known as ownership of fractional shares or stock slice. As such, investing has been made more accessible for people at all levels of the social ladder.

How Are Fractional Shares Formed?

Fractional shares may be formed through one or all of the following methods explained below:

  1. Dividend reinvestment plans
    Dividend Reinvestment Plans (DRP) are offers made by companies that pay dividends on their shares. DRPs allow investors to use the dividends they receive on their shares to reinvest in the company. In this case, when the dividend cannot purchase a whole share, investors can factor it into a fractional share.  
  2. Merger Options
    When firms or companies combine their stocks, it results in fractional shares. Generally, if the companies' combination ratios are different, it can lead to the distribution of fractional shares to shareholders of the merged company.
  3. Expensive shares
    Companies with expensive shares often have the option of fractional shares aimed at making an investment within them more accessible. For instance, a company whose shares at sold at $ 2000 per share will have a limited number of investors. However, if they allow investors to buy fractions of shares, they can have more investors come on board. 

How Does Fractional Investing Work?

Fractional investing is facilitated by brokerage platforms that offer the option to buy and sell fractions of shares. When an investor buys a fractional share, they own a proportional stake in the company, which means they are entitled to a proportionate share of any dividends, stock splits, or other corporate actions.

Fractional shares can be as small as 1/1000th of a share, which makes investing in high-priced stocks more feasible for those with limited capital. For instance, if a stock is trading at $1,000 per share, an investor can choose to buy 1/10th of a share for just $100 or even 1/1000th for $1, thus making stock market investing more affordable and flexible.

Moreover, publicly traded companies offer benefits to the shareholders depending on the percentage of the share. 

This means that if a whole share generates a profit of $ 100 annually, an investor who buys half of the share gets half of the profit ($ 50). 

Also, if the company offers dividends on shares, a fractional share gets dividends proportionate to the percentage of the share bought. 

What are the Benefits of Fractional Investing?

  1. Affordability 
    As mentioned earlier, fractional shares make investing in high-priced stocks with a smaller initial capital outlay possible. This is particularly important in Africa, where disposable income may be limited. With fractional investing, tech-savvy Africans can begin investing in the stock market without breaking the bank.
  2.  Diversification
    Fractional shares enable investors to build a more diversified portfolio with limited funds. By owning fractions of shares in multiple companies across various sectors, many young people can reduce the overall risk associated with their investments and potentially enhance returns.
  3. Accessibility 
    Many global brokerage platforms that offer fractional shares have developed user-friendly mobile apps and online platforms. These innovations make it easier for tech-savvy Africans to access and manage their investments, regardless of their location.
  4. Global Exposure
    Fractional investing allows African investors to participate in the growth of international markets and leading global companies. This exposure helps them to diversify their investments beyond their local economies and benefit from the performance of well-established global brands.

What are the Challenges of Fractional Investing?

  1. Voting rights
    Shareholders with fractional shares may participate in other corporate activities like stock splits and mergers but cannot participate in shareholder votes. This only means that they are limited as far as decision-making is concerned within the company in which they own shares. It is important to note that this varies from one stock to another.
  2. Transferability
    Fractional shares cannot be transferred to other shareholders in case an investor decides to withdraw from a particular stock market. As such, they can only be sold at prevailing market prices. On the other hand, only whole shares can be transferred to other brokers should the owner want to move out of the stock market. Consequently, a fractional shareholder risks selling a share at a lower price than he bought it. Sounds like a bad business deal!
  3. Service fee and Transaction cost
    Fractional shares are mostly sold by brokers. As such, when the shares are obtained from a dividend-paying stock, brokers are likely to charge a fee for them. 
    In other words, If an investor buys fractional shares for $200 and receives a dividend of $2 on these shares, the broker from whom he bought the share may agree with them to have a fraction of the dividend each year. 
    Besides, some brokers also charge a fee for buying or selling fractional shares. This may be up to 1% of the total amount transacted for the share.

How to Get Started With Fractional Investing in Africa

Investing in shares can be a costly and risky venture. However, the possibility of joining the stock market through fractional shares is a great opportunity, as you may invest only as much as you can stand to lose. 

To get started with fractional investing in Africa, it is important to Do Your Own Research (DYOR) on the kind of stocks you are interested in. This lets you know exactly what to invest in and the profits you can make from your investments.
Also, it is more beneficial to buy shares from dividend-paying stocks. You will be making extra cash from the yearly dividend as well as the profit gotten from the appreciation of your shares. 

Gold mining, financial and information technologies are considered profitable domains in which companies offer shares in Africa. 

Fractional shares are purchased through a process called dollar-based investing. This strategy lets you buy shares according to your purchasing power in USD. 

For instance, a share can cost as much as $1000, but your purchasing power allows you to buy a fraction as low as $200, depending on the options offered by the broker or company

In a nutshell,

Fractional shares represent a portion of a full share. They are not usually traded on the stock market and are often exchanged by large brokerage firms.

Fractional investing is revolutionizing how to invest in the stock market by breaking down barriers and providing affordable access to valuable investment opportunities. By leveraging the power of fractional shares, more people can diversify their investments and secure their financial future in an increasingly interconnected global economy. So, whether you are new to investing or looking for ways to diversify your portfolio, consider exploring the world of fractional shares and unlock the potential of the stock market.

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