Big-time stock traders deal in lots of thousands of shares at a time. Smaller investors may have to settle for odd-lots, purchasing 27 shares of GOOG or 52 shares of GE. Some investors, through dividend reinvestments, even end up holding fractional shares of a stock, such as 15.244 shares of MRK. Selling your fractional shares is not as straightforward as selling whole shares of stock.
Many stocks pay a share of profits to the company's shareholders. These payments are known as dividends and can be a substantial part of an investor's returns. Dividends are often paid even if a company's stock price decreases, so that the dividend payments partially offset the lost value of the shares.
Dividend Reinvestment Plans
Many companies that pay dividends offer investors a dividend reinvestment plan (DRIP). Shareholders who participate in a DRIP receive a fractional share of stock in lieu of a cash dividend payment. The fractional share is equal in value to the dividend payment at the time the dividend is issued, although the share value then increases or decreases with the overall changes in stock price.
Other Fractional Shares
Investors can also accumulate fractional shares through other means. For example, a 3-to-2 stock split can leave an investor with a fractional share, as can a company merger or buyout. In most cases, these fractional shares are paid out as cash equivalents, but some companies will keep the fractional shares in the investor's account. It is also possible to buy fractional shares directly through services like ShareBuilder.com.
Selling Fractional Shares
Brokerages do not generally have provisions for entering an order to sell a fraction of a share. Instead, investors elect to close their holdings in a stock -- that is, sell all their shares -- by entering an order to "close position." This final sale disposes of all shares, including fractional shares, which return a value proportional to the price of a full share. For example, an investor who sells 10.5 shares of a stock at $10 per share receives $105 for the sale, prior to any transaction fees.
- TD Ameritrade: Account Handbook
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- Yahoo! Finance. "Alphabet Inc." Accessed Aug. 26, 2020.
- Interactive Brokers. "Interactive Brokers Offering Fractional Share Trading Broker Broadening Access to More Expensive Stocks and Facilitating Portfolio Diversification." Accessed Aug. 26, 2020.
- Fidelity. "Fidelity Simplifies Investing Again with Launch of Real-time Fractional Shares Trading for Stocks and ETFs." Accessed Aug. 26, 2020.
David Sarokin is a well-known specialist on Internet research. He has been profiled in the "New York Times," the "Washington Post" and in numerous online publications. Based in Washington D.C., he splits his time between several research services, writing content and his work as an environmental specialist with the federal government. David is the author of Missed Information (MIT Press, 2016), a book exploring how better information can lead to a more sustainable future.