Fractional shares of stock may be purchased through a brokerage firm, a dividend reinvestment program, a direct stock purchase plan, or acquired due to a corporate action such as a stock split.
For example, company XYZ’s stock is trading at $100 per share. If an investor wanted to purchase just $10 of company XYZ’s stock, the investor would purchase 0.10 fractional shares.
Fractional shares are not purchased in the open market; instead, they are purchased through a brokerage firm or corporate program. Fractional shares allow investors to purchase higher-priced shares of stock in accounts with small balances. If an investor with a $2,000 account wanted to purchase shares of a stock with a price per share of $1,000, it would be difficult to accomplish specific account goals like risk management and diversification.
Many brokers offer the opportunity to purchase fractional shares of stock in increments as low as $1 to $5. Fractional shares of stock improve investment accessibility and provide cost-effective opportunities to diversify portfolio holdings with a customized selection of investments for those who would otherwise be unable to afford higher priced assets.