How Do Fractional Shares Work?

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Fraction shares are a part of the whole share and allow you to invest in shares of companies that otherwise may be out of reach. Fractional shares are a boon to new investors, as they can buy expensive stocks for as little as 1 dollar.

You can buy fractional shares when you do not have the money to buy a full share of the company. You can invest in them if you want to invest a fixed amount in stock monthly, rather than buy a round number of shares with fluctuating prices.

Fractional shares The fractional shares can be owned in the following ways:

When a company splits its stocks, it gives a boost to the share count and the investors an additional share of stocks. For example, in the 3:2 share split, the investors will get 3 shares for every 2 shares. If the investor owns 15 shares, then the final count would be 22 1/2 shares. The extra half-share is the fractional share.

When the dividend reinvestment plan (DRIP) is paid out by the companies, the investors use them to reinvest and automatically purchase new shares. When this happens, the investors end up with a fractional share. For example, if the dividend payout is $.30 per share, and you are getting a dividend of $60 in a year. If the stock is priced and $40 then you will buy 1 1/2 shares.

When the companies are merged or acquired, then their stock may be exchanged for new shares formed. A ratio is used to combine the stock of different companies, resulting in fractional shares.

Benefits of fractional shares

You can start investing with smaller amounts of money. If you are just starting to invest and do not have a large amount of money, then fractional shares can help you out. You can get into the market immediately and get the benefits of compounding returns sooner.

You can diversify your portfolio with a small amount of money. By owning different stocks, you can reduce the likelihood of losing your money if anyone stock underperforms. Fractional trading allows you to buy shares from $1 to $5 you can buy a wider selection of stocks.

With dollar cost averaging, you can save a small amount of money regularly. It focuses on consistent dollar amounts, and your money need not be kept in the cash account before you can afford to buy a full share.