Fractions are an important part of math but have you ever wondered what a fractional share is? You may have come across this phrase but do not know what it means.
A fractional share is a unit of ownership of a company that is less than one full share, and this article will explain how fractional shares work and how they are used in the financial world.
What is a Fractional Share in Stocks?
Fractional shares are a type of investment in which the investor purchases partial shares of a stock or other security.
For example, if a publicly traded company were trading at $100 per share, an investor may purchase a fractional share for $50 instead of one full share. Fractional shares can be a useful way for investors with limited funds to still participate in the stock market.
Fractional Share Example
An investor may purchase 1/10th of a share for $10 with the share currently trading at $100. This gives the investor ownership of .1% of the company, but at a much lower cost than if they had purchased a full share. Fractional shares are becoming increasingly popular with the rise of fractional trading apps, like Robinhood, which allow investors to buy portions of stocks.
What are the Advantages and Disadvantages of Fractional Shares?
The advantages of fractional shares are as follows:
- Being more affordable: Fractional shares allow investors to purchase a part of a whole share. This means that investors with smaller budgets can benefit from the same ownership in stock as those with larger budgets.
- Diversification: Diversifying your portfolio is essential for good investment management, but it can be hard to do when you have a limited budget. With fractional shares, you can afford to have a diverse portfolio.
- Low Impact Investing: Much of the anxiety and risk associated with traditional investing can be reduced by the purchase of fractional shares. This is due to the fact that fractional investments are much smaller and have a much lower associated level of risk.
The disadvantages of fractional shares are:
- Liquidity: Liquidity is a major concern when investing in fractional shares, as the assets are not as liquid as a full share. This means that it may be difficult to sell or trade your fractional shares quickly should you need to do so.
- Lack of Voting Rights: As the investor only owns a fraction of the stock, they are unable to exercise full voting rights on the stock. This means that they are limited in their ability to influence the company’s direction.
- Higher Brokerage Fees: Investors may need to pay higher brokerage fees due to the smaller size of their fractional share purchases. This could make the investment less affordable and reduce potential returns.
How to Buy and Sell Fractional Shares of CFDs?
Fractional shares of Contracts for Difference (CFDs) are traded just like other types of financial instruments. The process begins by selecting a broker and then opening an account with them. Once the account is opened and funded, investors can place orders just like they would any other type of security
Many CFD brokers offer access to an online trading platform, allowing traders to buy and sell CFDs in the comfort of their own homes. Traders will need to research which CFDs to buy, as each one is different, and understanding the risks associated with each one is a must before executing any trades
When it comes to buying and selling fractional shares of CFDs, investors should first look for the best possible price and take advantage of any available discounts. It is also important to consider the commission fees, which can vary between brokers, as well as any other trading fees associated with the CFDs
Finally, once an investor has selected the CFD they want to buy or sell, they can then place the orders either online, through a broker’s telephone service, or through the broker’s office.
Investors should also keep a close eye on the markets and adjust their trades accordingly to suit any changes in the value of the CFDs.
