Fractional shares: Overview, definition and example
What are fractional shares?
Fractional shares refer to a portion or a fraction of a full share of stock or equity. Instead of owning a whole share, an investor may own a piece of a share, which is especially common when stock prices are high or when dividends or other investment activities involve distributing less than a full share. Fractional shares allow investors to invest smaller amounts of money in expensive stocks without having to purchase a full share.
For example, if a stock costs $100 per share and an investor only has $25 to invest, they may be able to purchase 0.25 of a share, known as a fractional share.
Why are fractional shares important?
Fractional shares are important because they allow investors to diversify their portfolios and invest in high-priced stocks with smaller amounts of capital. This is especially beneficial for those who do not have enough funds to buy full shares of expensive stocks, enabling them to still participate in the potential growth of those stocks. Fractional shares also make reinvestment programs, like dividend reinvestment plans (DRIPs), more accessible by allowing dividends to be reinvested in fractional amounts of shares rather than in whole shares.
Including provisions for fractional shares in investment contracts or agreements helps ensure clarity around how shares are divided and traded.
Understanding fractional shares through an example
An investor purchases shares of a tech company priced at $1,000 per share. With $500 to invest, the investor buys 0.5 of a share, meaning they now own half of one share. Over time, the stock increases in value, and the investor’s fractional share appreciates just as a full share would.
An example of a fractional shares clause
Here’s how a fractional shares clause might appear in a contract or investment agreement:
“In the event that dividends are declared, the dividend shall be paid in fractional shares of stock, in accordance with the proportion of shares held by the investor. Fractional shares resulting from any purchase, reinvestment, or dividend allocation shall be rounded to the nearest whole share, or, where applicable, held as fractional shares.”
Conclusion
Fractional shares are a valuable tool for investors, enabling them to buy a portion of a share and invest smaller amounts of capital in otherwise expensive stocks. These shares make investing more accessible and help in diversifying portfolios. A well-structured clause addressing fractional shares in an investment agreement or contract ensures that both parties are clear about how fractions of shares are handled in different scenarios, such as dividend payments or reinvestment programs.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.