Owning fractional shares in a publicly traded company is not a new concept. However, new investors who own these shares often wonder if they have voting rights. This is mainly because the ability to intentionally purchase fractional shares is relatively new.
Fractional shares generally do not have voting rights. Still, before investing in a particular stock, you can check with the brokerage firm to see if voting rights are available, as that decision is solely up to the firm.
The rest of this article explains a few topics related to this question in great detail, including voting rights with stock, fractional shares, and voting rights in the traditional portfolio. We will also tell you why you may want to buy fractional shares even though you have no voting rights and the disadvantages of owning fractional shares.
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Table of Contents
What Are Voting Rights With Stock?
Companies sell stock shares to raise capital, and in doing so, they are giving shareholders a stake in the company or a claim to the company’s assets and profits. They are also giving them a say in decisions the company makes in the future.
This say in the company comes in the form of voting, and that is where fractional shares always present some challenges. There is no one way to decide which shareholders can vote or how many votes each shareholder receives. Still, most companies agree that fractional shares should not be considered when voting power is determined.
Many companies give their shareholders one vote for every share owned, while others grant one vote to each shareholder regardless of the number of shares owned. Most companies have agreed that fractional shares would not count as votes because they want fair representation. Therefore, the best way they have found to achieve this fairness has historically been to distribute voting rights based on whole shares.
When you own a fractional share, the inability to vote can be annoying because you may not feel fully invested, or even fully valued by the company as a shareholder. But, before you feel bad about this inability to vote, let us first understand what shareholders typically vote on. This will help you understand if voting rights even carry much value for you.
What Can Shareholders Vote On?
Although precisely what shareholders can vote on varies by company, it is crucial that voting be fair and unbiased because the profit of the company and that of every shareholder is at stake.
The following decisions are some of the decisions made based on shareholder voting:
- Stock splits occur when companies divide the existing stock into multiple shares. The dollar value to investors remains the same, but the stock trades at a lower value, so new investors feel comfortable buying the stock. The company normally increases its cash flow, and original investors own more shares, which means they have more voting power relative to the new investors.
- Mergers occur when two companies unite to form one stronger company. Mergers benefit all shareholders in the end because the new company typically has new product lines and more ways to earn revenue. However, mergers are highly risky and may hurt both companies.
- Acquisitions happen when one company purchases at least 51% of a target company’s stock, and these occur with and without the target company’s approval. Generally, the stock price of the acquiring company dips, and the target company’s price spikes.
- Structural Changes occur when there is a major change in the economy that necessitates a shift in the way the company does business. This shift can be in terms of technology or changes in the availability of resources, for example.
Additionally, voting shareholders affect who is on the board, managerial appointments, executive pay, and the company’s long-term, strategic goals.
So, based on the various ways companies assign votes and the importance of the decisions on the ballot, it is easy to see why there is a reluctance to give someone who owns .0003 shares in a company the same voting rights as someone who owns 30 shares. Still, it is also understandable that even the smaller investors want to have a say in what companies decide.
Fractional Shares and Voting Rights in a Traditional Portfolio
For the purposes of this article, a traditional portfolio is one that was built by purchasing whole shares of stock rather than using the “dollar-based” method of investing. And the example illustrates that owning fractional shares is not new. In fact, fractional shares have always existed and naturally occur in a traditional portfolio when an investor buys a certain number of shares in Company ABC.
Let’s say the initial purchase was for ten shares, and rather than sending a dividend check to the stockholder, those dividends are reinvested to purchase more shares. Frequently, the dividends are not enough for a whole share, but they bring the total shares to 10.5. The fractional share earns dividends but not more voting power.
In most cases, this scenario has no impact on the investor’s voting rights, but dividends would be paid on the whole and fractional amount of 10.5 shares.
Voting rights aside, investing in fractional shares is becoming a more popular option because more brokerage firms have realized the potential profits they can earn from allowing shareholders to invest based on dollar amount rather than a certain number of shares. Although this fractional purchase option can be a recordkeeping challenge for brokers, the potential for portfolios to grow makes the challenge worth overcoming.
Why Buy Fractional Shares if You Have No Vote?
Many people turn to the stock market, hoping to grow their money more quickly than they can with a savings account or by investing in real estate. Although the ability to vote is highly empowering, the inability to vote until you own a whole share should not deter you from investing.
Here are some excellent reasons to invest anyway:
- Dividends are paid based on what you own, whether the shares are fractional or whole. What’s more, most brokerage firms reinvest dividends to purchase more stock, so your account will continue to work towards owning a total share the moment you initiate the purchase.
- Investing in fractional shares means you can diversify your portfolio more easily, increasing opportunities and decreasing risks.
- Investing in fractional shares means you will be able to begin investing sooner because you do not have to save up for the entire share and possibly lose money while you wait.
- Investing in fractional shares allows you to own stock in high profit companies.
The Disadvantages of Fractional Shares
Besides being unable to vote on company matters, there are a few drawbacks to owning fractional shares that you should be aware of as an investor:
- You can only purchase fractional shares through brokerage companies, and many charge a subscription fee even if they have zero trades and commissions. Stash, for example, charges between $1 and $3 per month for a subscription, and the dividends on many accounts may not pay the fee.
- Fractional shares are not usually transferable. For example, you may have an account with a broker that charges a monthly subscription fee and find another broker you like that does not. In this case, you can transfer your money, but all fractional shares are liquidated, and you receive cash to reinvest in different stocks with the new brokerage firm.
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Conclusion
While you do not have voting rights with fractional shares, they are still a sound investment strategy, particularly for novice investors. You can use your dividends to purchase more until you gain a whole share. While there are drawbacks, the opportunity to grow your portfolio by owning stock in companies that would otherwise be out of reach is worth the few disadvantages of owning them.
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