Who hasn’t dreamt of buying a few hundred shares of some of the biggest companies in the world, such as Tesla, Amazon, or Google? Unfortunately, they cost a few hundred dollars, and this isn’t always possible. What happens if an investor wants to purchase $1000 of a stock worth $1500? Thankfully, many brokers now offer fractional shares for investors unable to purchase a full share.
This article will explore how fractional shares work and which rights they give to the shareholders. We will also examine which brokers offer fractional shares and under which conditions. Let’s begin.
To begin with, let’s define a fractional share and how it is obtained. It’s any number that isn’t natural, such as 0.01 or 13.6. Some platforms allow investors to purchase fractional shares directly. This will enable investors to purchase a fraction of a too-costly share.
Now that many brokers have slashed their transaction fees, purchasing stocks in low quantities is easier than ever. We will talk about these brokers in the last section. Purchasing fractional shares isn’t the only way of obtaining them. Investors also come across them in the following methods:
Dividend Reinvestment Plan (DRIP): Dividends are an excellent source of income for investors. When investors opt for a DRIP, they purchase shares with the proceeds from their dividends. Hence, it is highly likely that partial shares will be purchased. You can read our article here to learn more about dividend reinvestment plans.
Stock Split: Stock splits are a common way to obtain fractional shares. Let’s take a look at a recent example. OceanPal (NASDAQ: OP) recently announced a 1-for-20 reverse stock split. An investor who holds any number of shares not divisible by 20 will be left with fractional shares. To learn more about stock splits, you can read our article here.
Mergers & Acquisitions (M&A): When a public company gets acquired by another, investors get compensated with shares from the buying company. That number is a percentage of their shares and will often be fractional. In the next section, we will look at an example.
In this fictional example, an investor purchases 1000 company X shares, each worth $10. One month later, one share is worth $11. At that moment, he receives a dividend of 10 cents per share, and a DRIP is in place.
$0.10 x 1000 shares = $100
$100 / $11 = 9.09 additional shares.
After the DRIP, the investor has 1009.09 shares of company X. A few weeks later, the company’s board of directors approves a 3-for-1 stock split.
1009.09 x 3 = 3027.27 shares.
Finally, company Y decides to purchase Company X. Both companies agree that Company X shareholders will receive 0.41 shares of Company Y for each share of Company X they own.
3027.27 x 0.41 = 1241.18 shares.
In summary, the investor started with 1000 shares of company X. After a DRIP, a stock split, and acquisition from another company; the investor now possesses 1241.18 shares of a different company.
In this final section, we will explore which brokers offer fractional shares to their clients and which securities are available.
1. E-Trade
We begin with E-Trade. Despite all the features the platform offers its investors, buying fractional shares isn’t one of them. The platform does allow a DRIP as long as the stock or ETF trades above $5. On the bright side, E-Trade was recently acquired by Morgan Stanley, which has just begun offering fractional shares on its platform.
2. Merrill Edge
Merrill Edge also doesn’t support fractional share purchases. The platform supports fractional shares for a DRIP in mutual funds, ETFs, and stocks. There is no minimum share price.
3. Vanguard
Vanguard is one of the largest investment management companies that offer mutual funds and ETFs. The platform allows its investors to purchase fractional shares of Vanguard mutual funds and ETFs only. Fractional shares of stocks and non-Vanguard ETFs and mutual funds aren’t supported yet. As for a DRIP, mutual funds, ETFs, and stocks are supported except for some low-value and foreign stocks.
4. Charles Schwab
Since 2020, Charles Schwab has allowed investors to purchase fractional shares that are part of the S&P 500 index. The platform calls this program ‘’stock slices’’. The minimum amount needed is $5, and up to 30 stock slices from different companies can be purchased in a single transaction. Fractional shares for DRIPs are also allowed. Lastly, there aren’t any trade commissions.
More Brokers to Consider
5. SoFi
What is SoFi (NASDAQ: SOFI)? It’s a relatively new online personal finance company. Over 4000 fractional shares of stocks and ETFs are available on the platform for as little as $5. SoFi recently released option trading on their platform. It’s very user-friendly for all types of investors. Active members can even invest in IPOs and cryptocurrencies.
6. Fidelity
Next on the list is Fidelity. The platform has much more diversity for fractional shares than Charles Schwab. This program is called ‘’stocks by the slice’’ on the platform. Fidelity offers more than 7000 stocks and ETFs to be purchased in fractions with as little as $1. DRIPs also apply. You can do this without paying any trading commissions, as well.
7. Interactive Brokers
We continue with Interactive Brokers, which has even more diversity for fractional shares. IB has a pro and a lite platform. The latter is free but offers its investors fewer technical features and advantages. In both cases, investors have access to over 11,000 stocks and ETFs. This number also includes foreign stocks trading as American depository receipts (ADRs). The only condition is that the stocks must have an average daily volume over $10M or a market capitalization superior to $400M. However, only Canadian and US stocks are eligible for a DRIP. IB is among the best options for investors seeking to trade this way.
8. Robinhood
Moving on to Robinhood (NASDAQ: HOOD). Love it or hate it, Robinhood has favorable features for all investors. All purchases, including fractional shares and options, are free. Furthermore, investors can buy one-millionth of a share as long as one share trades above $1 and have a market cap of over $25M. ETFs and DRIPs are also supported on the platform.
To conclude, there are many ways for investors to come across fractional shares. An increasing number of platforms offer to purchase them directly, and even more, offer them via a DRIP.
If you want to learn more about profiting from the stock market, head to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.
Frequently Asked Questions
New traders can benefit from them, especially if you have little money to invest. As a result, you can own part of a large company.
Yes, you can. You can earn dividends and any money you get from selling shares.
They have low liquidity. Anything without interest will be hard to sell. However, dividends from these shares make them attractive to invest in.
