Fractional shares are a new way to buy stocks, and they’re a great way to diversify your investment portfolio or start investing in stocks as a new investor. Since fractional shares are a new concept to many investors, we get quite a few questions about them, one of them being: can fractional shares become whole shares? And do they add up?
Fractional shares can become whole shares after a stock split or after buying the remaining fractional shares that you need to make your fractional share whole. You can buy fractional shares from brokers who can split a share among multiple investors, but they’ll always add up to a whole share.
Want to learn more about these mysterious “fractional shares” and how they can impact your portfolio in the long term? This article will break down what fractional shares are, how you can buy them, whether they add up, and their benefits.
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What Are Fractional Shares?
Fractional shares — as the name suggests — are a fraction of a whole share of stock. These shares let you decide how much stock of a certain company to buy based on how much money you want to spend instead of how many shares you want to buy.
For example, if a share of company XYZ sells for $1,000, but you only want to pay $100 for a company’s share, you can buy a tenth of stock instead. Buying a fraction of a share saves you from paying more than you want to invest in a stock, and in this example, you don’t have to pay ten times more than you want to.
Fractional shares of stock come in all different increments depending on where you buy them. You’ll usually have to buy fractional shares from an investment broker because the broker can buy a whole share, then sell it as fractional shares to their clients. You can buy a portion of the share, and the remaining amount will go to other investors.
The benefit of buying fractional shares is that you can diversify your portfolio much easier than if you had to buy full shares of each company you want to invest in. For example, if you have only $1,000 to invest, you can buy ten shares priced at $100 a share from ten companies. Or, you can buy fractional shares and split your $1,000 across more than ten companies, thereby diversifying your portfolio and decreasing your risk.
Can Fractional Shares Become Whole Shares?
Fractional shares can become whole shares through something called a stock split. Stock splits usually occur when a company wants to increase its liquidity, dividing its current shares into smaller shares. All current stockholders will retain their current value of shares, but they’ll now have more shares, and each one will be worth less the money.
When a stock split occurs, and you have fractional shares, your new share amount will work the same as if you had full shares. For example, say you have 0.20 shares of company XYZ. If the company decides to do a 3 to 1 stock split, shareholders will receive three shares for every one share they currently have. Therefore, your 0.20 shares will now be 0.60 shares.
After a stock split, you may still own a fractional share, or you may have a whole share and a fractional share. For example, say you have a 0.80 share of a company, then a 2-to-1 stock split occurs. You’ll receive two shares for every share you own, leaving you with 1.6 shares.
You now have a whole share from your fractional share in addition to a new fractional share. Remember that a stock split will not increase your share’s price. If you have a share worth $100, after a 2-to-1 stock split, you will instead have two shares priced at $50 each.
So the price that your stock is worth remains the same, except now, you just have more shares.
It’s rare to end up with whole shares after a stock split without having any fractional shares leftover, but it’s technically possible.
We’ll discuss when this happens in the next section.
Do Fractional Shares Add Up to Whole Shares?
Besides sharing splits, you’ll have to buy more fractional shares if you want to have a full share of stock instead of a fractional share. Buying the remaining amount of your share is the easiest way to have whole shares instead of fractional shares. That’s because fractional shares rarely add up to full shares after a stock split.
While companies can do stock splits in any increment they choose, there are some common splits that companies usually use. The most common stock splits are 2-to-1, where a stockholder gets two shares for every one they own, or a 3-to-1 split, where stockholders get three shares for every share they currently own.
If you want to buy a fractional share of stock in hopes that it becomes a whole share, your best option is to buy either a 0.50 share or a 0.333 share. In a 2-to-1 stock split, your 0.50 shares will become whole, and in a 3-to-1 stock split, your 0.333 shares will become whole, depending on the mathematical rounding.
When you purchase a fractional share, the remaining fractional share is sold to other investors. There will never be a company with a non-whole number of shares on the market. Since total shares are never fractional, you need to purchase shares from an investment broker who will buy a whole share, then split it among clients.
In other words, the total amount of fractional shares outstanding will always add up to a whole number. Therefore, if you have a fractional share and you want to own a whole share, you’ll be able to purchase the remaining amount from your broker.
Learn About Investing in Fractional Shares
If you want to be a successful investor, you need to learn about the stock market before buying shares, even if they’re just cheaper fractional shares. These resources will be a great starting point to help you start investing before you start doing it yourself:
- First, The Universal Principles of Successful Trading: Essential Knowledge for All Traders will help you develop a trading plan, use different trading methods, and learn how to manage your money. This book is good for traders worldwide, and beginners will collect a lot of essential information after reading this.
- Next, Buffet’s 2 Step Stock Market Strategy: Know When to Buy a Stock will teach you how to use Warren Buffett’s strategy to invest your money in the stock market. There are many tips in this book, and you can use Buffett’s strategy to enhance your trading skills.
- Finally, this video from Trading 212 on YouTube will help you understand fractional share even more so you can start investing in them:
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Conclusion
Fractional shares are a good way to get started in the stock market or diversify your investment portfolio. Fractional shares will always add up to whole shares, which is why you need to buy fractional shares from a broker who will split one share among multiple investors.
If you want to increase your fractional share to a whole share, you will need to hope for a stock split, or you will need to buy the remaining fractional shares from your investment broker. Make sure to learn about the stock market before using fractional shares to benefit your investments.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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