Fractional Shares

Upon first glance at the term "fractional shares," you may think it has something to do with the universal sharing phase of children. You know, the phase when they will only share some of the time (or "fractionally").

While this is true in the world of moms, though, fractional shares actually have an entirely different meaning in the world of finance. Let's take a gander at this term.

According to Webster . . .

Don't let the "fraction" in fractional shares scare you off; we're not taking a trip down memory lane to that junior-year algebra class you barely scraped through. When you look at the words themselves, the definition of a fractional share makes sense. Simply put, the term means a share of a stock or mutual fund that is less than a whole share.

And These Come About How?

Most commonly, fractional shares are a result of a Dividend Reinvestment Program (or a DRIP; more on these in a few seconds). Stock splits are also another means of arriving at a fractional share. Also, some stocks allow investors to purchase fractional shares (we'll get to this, too).

DRIPs

Ah, finally a drip that doesn't mean a mess for a mom to clean! As we mentioned above, fractional shares often come about due to a Dividend Reinvestment Program, or a DRIP (to those in the know). In a nutshell, if your stock investment pays you dividends, some companies will let you reinvest that dividend money right back into more stock shares.

Oftentimes, that dividend amount that you recieve will not be the exact amount needed to buy, say, three full shares. But it could be enough to buy two and a half. Rather than rounding that dividend amount up or down, the company may allow you to purchase one half of a share, or a fractional share.

One important note: fractions are not limited to the 1/2 mentioned above. Rather the dollar amount of your dividend will determine your share fraction amount (any amount really, including 1/3, 1/4, 2/5, etc.).

Buying Fractional Shares

Also, if your heart is set on purchasing a large dollar stock, some companies are allowing fractional share purchases. Since some stocks sell at astronomical prices per share (think $10K plus), these stocks could be out of reach to the everyday investor.

However, these ingenious companies have identified those would-be investors and are appealing to them with fractional shares. Now, these shares do come at a pretty high price; the fees to the investor are often much higher. Bottom line: you can buy fractional shares of stocks if you really want to, but it will cost you.

Fractional shares can come in handy in your investment portfolio. If you buy dividend stocks, for example, reinvesting your dividend into the company through fractional shares can help you continuously build your savings. And buying those large dollar stocks just may be within your reach.

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