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Fractional or practical shares are an excellent investment for rookies who are just starting or lack the funds to buy the pricey shares in the market. These shares are traded through investment brokers. It is inevitable that you will sell your fractional shares, but is that process easy. The answer is No. It isn’t easy to sell fractional shares as the transaction needs to go through a similar brokerage account from which you purchased those shares. The catch is that fractional shares are not desirable, and high demand for them is seldom seen. Since these shares are available in increments, it is complex to find a buyer who wants those shares for your part of the fraction.
To have a more comprehensive understanding of fractions shares, keep reading this article and find out how you can purchase or sell them.
What are fractional shares?
Fractional shares allow you to invest in your dream company for a price much lower than that of the market value of the actual share. Hence, they are also known as partial shares. These shares are suitable for people looking to diversify their portfolio or want to trade in shares outside of their budget.
Fractional shares entail that you own a share based on price and not the share volume. E.g., A company with a share of $500 and you invest $100 in it means you own 0.20 fraction of a share and enjoy the benefits of a whole share, excluding the voting right.
Buying a fractional share
To purchase these shares, you have to find a broker who has bought the shares at the market value and is dispersing those shares by breaking them down into parts to interested traders. These shares can be broken down into parts based on demand in the market.
However, this method is also not free from some struggle. For example, investment brokers sell these shares from selected companies only, like the S&P 500. This is also dependent on the demand and price of the share.
Where can you buy fractional shares?
Here are the names of investment brokers where you can find these partial shares:
- Stash
- Bumped
- Stockpile
- Acorn
- Fidelity
- Interactive brokers
- Charles Schwab
- Sofi active investment
- Robinhood
Other ways of buying fractional shares
Besides getting it from a broker, you can also acquire partial shares from a stock division or split. The standard algorithm for when a stock is split is a 3:2 split. So, for instance, if you have two shares, you will get three shares of the stock.
If you only own one stock and not two as needed by the split, you will get 1 ½ shares during the split. Hence, you can use this ratio and purchase fractional shares.
The shares acquired in a stock split are also beneficial because you can sell them to many brokers instead of when you buy partial shares and can only sell them to one broker. When a brokerage buys your fractional share, it will start buying more shares from the same organization to complete a whole or sell them. Usually, the brokerage decides to choose the former option as selling fractional shares is hard.
Is it Easy to Sell Fractional Shares?
No, it is not easy to sell fractional shares. Fractional shares are tough to sell because you need to sell them using the same brokerage account that you used to buy them. As a result, demand for fractional shares is low, and it is hard to find buyers that want to buy the same stock with the same increment.
The desire for fractional shares is not always high. Hence it isn’t easy to sell them. If you own a partial share, you need to look for a customer who will buy the company’s shares and in that exact fraction, which is a longshot.
If the demand is at an all-time high, you can sell your share quickly. However, the chances of that situation are very slim and, and not many people from the same brokerage will be willing to buy those shares.
Additionally, you cannot leave your broker if you want to retain the other fractional share. Since the brokers split whole shares to sell them infractions, you cannot leave them.
If you want to switch to another broker, you have to put your fractional shares for sale, put the money in your account, and transfer your funds with a new broker. They are hard to sell. Hence, you need to be mindful while buying fractional shares if you want to change your broker in the future.
Do you earn dividends on fraction shares?
Yes, you earn dividends proportionally on fraction shares. So, for example, if you own 50% of a share, you get 50% of the dividends that a total share pays.
How do investment brokers sell fractional shares?
Selling fractional shares is difficult even for the brokers. Their process involves purchasing a whole share and then splitting it into parts according to the demands. To understand that concept, if you are a broker and the demand for a share is 0.20, you cannot split that whole share into other fractions like 0.50 or so.
Additionally, brokers sell only a part of those fractional shares to prevent losses and avoid any mishaps in the future. For example, if an investment broker has a sarees of ABC company and splits it into 0.10 fractions, he can sell 6 of them. The rest of the shares will remain stagnant without yielding any profit.
Conclusion
Hence, fractional shares are hard to sell as you only have limited options. Your seller should also be open to the idea of sharing increments from the shares sold. Fractional shares are beneficial if you intend to sell them as soon as you buy, then you should reconsider this purchase.
