A fractional share is when less than a full share of equity is owned which is commonly associated with stocks. This can occur by way of dividend reinvestment plans (DRIPs) which a program where investors opt-in to automatically have reinvest their cash dividends into additional shares or fractional shares. Some companies also offer their shares to be purchased through a program through the company directly or a third-party organization.
Dividend Reinvestment Example
For example, if a shareholder owned 100 shares of Apple and they paid out a dividend of $1.00 per share; that means $100 would be received. Suppose the stock price is at $200 - the $100 would purchase one-half of a share. This means the shareholder now has 100.5 shares and this is where the fractional ownership comes into play.
Stock Splits
Fractional shares can also be owned by way of stock splits. If we take the current 100.5 shares in the above example and Apple splits 3 for 1. This means that 100.5 would be multiplied by three equating to a current share ownership of 301.5.
Mergers and Acquisitions
Mergers and acquisitions (M&As) can also create fractional shares. For example, you may own 103.25 shares of company XYZ that are bought out by company ABC which is offering seven shares for every share of XYZ. So the math is: 103.25 is multiplied by seven which would bring the share total to 722.75.
Fractional or Stock Slice Ownership
This became more prevalent and popular in 2020 where you can go to your online broker such as Charles Schwab (stock slices) or Fidelity (fractional shares) and buy directly. This is the most convenient way to own shares with 0% commissions.
There are also apps that will take your leftover change from transactions and round to the nearest dollar to invest or let you invest directly (Acorns) at little-to-zero-cost to trade.