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Things To Know Before Buying Fractional Shares

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Want to diversify your investment portfolio? Read this article to find out the things you need to know before buying fractional shares and understand what they are.

Fractional Shares in Canada

Source: Pexels

Are you looking for ways to diversify your portfolio that do not cost you too much? Do you want to get a stake in an organization you cannot afford? Know everything about fractional shares in Canada.

KEY HIGHLIGHTS:

  • Fractional shares represent a percentage of the entire share of a company
  • It is a legal process, and you can buy fractional shares in Canada if your broker supports it
  • The price of fractional shares is less than the complete equity shares
  • Sometimes fractional shares created because of the stock splits

What Are Equity Shares of a Company? Explain to Me in Simple Language.

Let us now explain “an equity share” in biology.

Human beings comprise several cells, which act as the smallest unit. There are trillions of cells in our body responsible for a definite human structure.

Likewise, the equity shares are the smallest unit of a company. Their numbers could vary from organization to organization and would define a company’s size and structure.

For example, In the last quarter of 2021, Microsoft had 7.555B outstanding equity shares compared to 0.513B outstanding shares of Marsh and McLennan Company, a lesser-known business organization operating at a far lower scale.

What Are Fractional Equity Shares of a Company in Simple Language?

Let us assume a hypothetical situation. There is a listed company with only one equity share. Noah is presently the owner of this bizarre company, and now he aspires to dilute his equity ownership to infuse more capital into the company.

He approached you and asked if you would be interested in becoming his business partner. You were looking for excellent business opportunities for quite some time, and hence you said an instant “YES.”

Since there is only one share in the company, Noah sold 50% of the share to you. This one stock was trading in the market for $500 per share, and since you are buying half of it, you will now be required to pay $250 ($500/2) to get 50% ownership. You might not know, but by buying 50% of the share, you bought a fractional share and added it to your kitty/ portfolio.

Of course, this story was an imagination. However, the concept remains the same when you try buying fractional shares of some established corporations.

For example, 

The stock price of Berkshire Hathaway (the most expensive stock in the world) was trading at CAD 723,325 while authoring this article. Most marginal and conservative investors might not be willing to buy one complete share because of its exorbitant market price.

Hence, as an alternative, they will now indulge in fractional buying. The percentage or fraction of one share you buy will decide:

  • How much money will you invest?

and

  • How much stake will you get in such an organization?

So, fractional shares are a part or percentage of one full share of a company. They are less than one full listed share and give you partial rights.

Stock split
Source: Pexels

How Are Fractional Shares Created Through Stock Split?

A stock split is a process following which a company can augment its number of outstanding shares in the market and make it more affordable. It reduces the stock’s current market price (CMP) and increases the number of shares held by the shareholders.

There is no definite pattern or ratio in which a stock split occurs. Some organizations prefer to allot 3 shares for every 2 shares, and some prefer to allocate 5 for every 1. It entirely depends upon the requirements, strategies, and decisions the board of directors has taken.

A stock split often leads to fractional holding for the investors because of its random exchange ratios. Let us understand this concept with a practical example.

Alex is a stock market investor and holds 67 shares of ABC Financial Services Inc. at $700 apiece. To enhance liquidity for its stocks and make them more affordable, the company has split the stocks in the ratio of 3:2.

It means that all the existing shareholders get 3 shares instead of 2 shares currently held by them.

As per the above scheme, Alex got 100.5 shares 100.5 shares (67/2 * 3) in exchange for his 67 shares. It represents the fractional holding wherein Alex holds:

  • 100 of complete shares of ABC Financial Services Inc.

and

  • A half share of ABC Financial Services Inc.

Is Buying Fractional Shares Legal in Canada?

The short answer is YES. Presently, there are no rules, laws, or regulations that prohibit the act of buying fractional shares in a listed company. However, it is pertinent to note that the broker must allow “fractional buying.” 

If you are dealing with a broker that does not allow the trading of fractional shares, you cannot buy fractional shares of your target company.

What Are the Different Brokers in Canada That Allow the Buying of Fractional Shares?

Fractional shares can be an excellent way to diversify and own a partial stake in an organization. But only a few select brokers allow trading in fractional shares in Canada. Some of the most famous, safe, and prominent brokers are:

  • Wealth Simple Trade
  • Share Owner Investment Inc. and
  • Interactive Brokers
Fractional shares
Source: Pexels

How Can You Buy Fractional Shares in Canada?

The process is simple. First, you need to open a trading account with any broker which allows trading in fractional shares. Post this, follow the below steps:

  • Step I: Sign into your trading account
  • Step II: Search for the stocks that you feel will surge in value soon
  • Step III: Deposit the required margin requirements or funds into your trading account
  • Step IV: Click on the option of Fractional Trading
  • Step V: Search for your target stock and click on it
  • Step VI: Place a market order and enter the fractional quantity which you want to buy
  • Step VII: Finally, check out all the details and confirm your order

After correctly following all the above steps, you will see the fractional quantity of the stock in your Demat account.

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