Fractional shares have revolutionised the world of investments by making high-priced stocks accessible to a broader range of investors. These shares are a part of a full stock and allow investors to diversify their portfolios with lower capital investments.
Unlike full shares, fractional shares cannot be bought and sold in the open market and have to be purchased and sold through brokerage houses. They are commonly created through corporate actions such as stock splits, mergers, and dividend reinvestment plans (DRIPs).
Keep reading this space to learn more about how fractional shares can be traded and their advantages and disadvantages for traders.
What is Fractional Shares
A fractional share represents a portion of a full stock, typically created through corporate actions such as bonus share issuances, dividend reinvestment plans (DRIPs), and stock splits.
Unlike full shares, fractional shares cannot be directly traded on the open market. Instead, they must be bought or sold through brokerage platforms that support fractional investing.
The primary advantage of fractional shares is that they enable investors to diversify their portfolios without requiring significant capital. This makes it easier for traders to gain exposure to high-value stocks and build a balanced investment strategy.
The Mechanics of Fractional Shares
As a trader, you can purchase and sell fractional shares, but selling them can be challenging, especially if the stock has limited demand. Fractional shares are often created through corporate actions such as stock splits, when a company increases its outstanding shares to enhance liquidity, typically in a 2-for-1 or 3-for-1 ratio, it may result in fractional shares.
Mergers and acquisitions also create fractional shares when brokerages split whole shares, allowing high-priced stocks to be more within reach of individual investors.
Additionally, dividend reinvestment plans (DRIPs) also contribute to the creation of fractional shares. When dividends are automatically reinvested to purchase additional shares, the amount may not always be enough to acquire a full share, leading to fractional ownership.
While this type of share provides investment entry points, restricted trading options restrict liquidation capabilities, and investors must unload them through broker firms.
Benefits of Investing in Fractional Shares
The following are the most important benefits of investing in fractional shares:
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Access to Expensive Stocks
Fractional shares enable investors to buy portions of expensive stocks such as Amazon or Alphabet without needing large capital. Instead of purchasing whole shares, investors can start with small amounts, making the stock market more inclusive.
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Portfolio Diversification
These shares allow investors to diversify their capital in several stocks and ETFs, minimising the risk of depending on a single stock. Even a ₹50,000 portfolio can be adequately diversified, allowing investors to manage risk effectively.
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Cost-Efficiency and Improved Capital Allocation
Fractional share trading enables better capital utilisation. Moreover, investors can allocate their money strategically so that they can reap the most from their investment allowance without being limited by the steep price of sole shares.
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Risk Management
By holding fractional shares in multiple companies, investors can mitigate the impact of underperforming stocks on their overall portfolio. This diversification helps maintain stability and supports long-term financial growth.
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Rupee Cost Averaging Strategy
Fractional shares allow investors to use the rupee cost-averaging strategy, where they invest a constant amount at regular intervals. This method helps smooth out market volatility, as more shares are purchased when the price is low and fewer when the price is high, leading to a balanced investment approach over time.
Steps to Invest in Fractional Shares
Fractional stock investing enables people to buy a fraction of a company’s stock, thereby making expensive stocks affordable. To begin investing in fractional shares, take the following steps:
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Step 1: Open an Investment Account
Start by opening an investment account with a robo-advisor or an online brokerage account. A robo-advisor provides automated investment services with less active management required, while an online broker offers greater control over investment decisions.
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Step 2: Fund Your Account
Add sufficient funds after your account is created to trade fractional stocks. Generally, this is possible through bank transfer, UPI, or the other payment options available on the platform.
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Step 3: Select Desired Stocks
Once you have funded your account, research and pick the stocks you would like to trade. Most online trading platforms enable you to begin small and invest a fraction of company shares, keeping the stock market within reach.
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Step 4: Place Your Order
Decide on the amount you want to invest in each selected stock and place your order through the platform. The platform will then allocate the corresponding fraction of shares based on your investment amount, ensuring proportional ownership.
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Step 5: Monitor and Manage Your Investments
Periodically check your investment portfolio to make sure it reflects your financial objectives. Rebalance your investments accordingly, taking into account market performance and individual financial goals.
Assessing the Risks of Fractional Shares
Fractional share trading provides access to expensive stocks, but it has some risks:
- Volatility: The prices of stocks can change quickly, which may result in losses if the price drops after your investment.
- Costs: Investing in fractional shares can come with commissions and fees, which can lower overall returns.
- Lack of Liquidity: These shares may be more difficult to sell immediately, so it can be difficult to liquidate your investment when necessary.
Final Thoughts
Fractional shares offer a flexible and affordable way to invest in high-value stocks, making the stock market more accessible to everyone. They allow investors to diversify their portfolios, reinvest dividends, and start investing with minimal capital. However, it is essential to understand the risks and choose a reliable brokerage platform.
If you are ready to start your investment journey, open a FREE Demat account with Torus Digital today and take your first step toward financial growth!
