Monthly Financial Jargon: Fractional Shares and Stock Slices

The world of finance and investments is notorious for its extensive use of jargon. With a goal to enhance financial literacy and make the world of money more transparent, we have our “monthly jargon” articles that focus on debunking financial terms that are often used sans explanation. This month, we’re discussing two synonymous investment terms: fractional shares and stock slices.

Fractional Shares

A fractional share is very much what it sounds like: a piece – or share – of a stock. It refers to any holding less than one full share of a security that provides ownership to shareholders. Fractional shares are typically not available from the stock market, and although these types of shares still hold value for investors, they can be difficult to sell due to their innate fractional nature.

Let’s briefly break down the ways in which fractional shares may be created.

1. Stock splits: A stock split involves a company dividing its existing shares into multiple new shares to augment the stock’s liquidity. Depending on the split ratio, stock splits often do not result in an even number of shares, leaving some investors with fractional shares.
2. Dividend Reinvestment Plans (DRIPs): A dividend reinvestment plan provides investors with the opportunity to reinvest cash dividends – money directly distributed to stockholders as part of a corporation’s earnings or profits – into additional shares of the dividend-offering corporation. Through a DRIP, investors are allowed to purchase additional shares of the company paying the dividend. As investors purchase additional shares with the cash dividends, the dollar amount may not cover an even number of shares, resulting in the creation and purchase of fractional shares.
3. Capital gains: Similar to dividend reinvestment plans, reinvesting capital gains distributions – taking a profit on the sale of an investment to purchase more shares of the stock – can result in the purchase of fractional shares, as the cash reinvested will most likely not purchase an even number of shares.
4. Dollar-cost averaging: Dollar-cost averaging involves spreading out stock purchases over time to reduce the impact of price swings and volatility. With dollar-cost averaging, investors put a set amount of money into a stock at a regular interval, regardless of how the stock is performing. The amount an investor puts in periodically may not always purchase full shares, resulting in the purchase of some fractional shares.
5. Mergers and acquisitions: Mergers and acquisitions, also referred to as M&As, involve the combination and consolidation of companies or assets. When M&As occur, the companies combine the stocks at a ratio that often results in fractional shares.

When a transaction occurs that results in fractional shares, specifically in the cases of stock splits or mergers and acquisitions, shareholders are sometimes given the option to obtain cash instead of the fractional shares, but this opportunity is not always available and is not always preferable given the fact that the cash acquired is taxable. Fractional shares do not trade on the open market, and the only way to buy or sell these shares is through a brokerage, a company that acts as a middleman for the buying and selling of investments. Some brokerage firms will deliberately split shares with the intention of making fractional shares available to clients who may otherwise lack the funds to purchase a full share of a stock.

Stock Slices

Stocks slices and fractional shares are synonymous terms that represent the same thing: a portion of a stock that is less than one full share. You may see the term “stock slices” used more often when investors are actively seeking to purchase a portion of a share of a pricier stock. For example, Charles Schwab has a program called “Stock Slices” that the company launched in 2020, that allows investors to purchase any S&P 500 stocks for a minimum of $5 per stock, regardless of the cost per share of a stock. In other words, investors can divide their investment across multiple stocks by purchasing slices of a variety of stocks instead of being limited to purchasing full shares. Fidelity has its own version of such a program that it calls “Stocks by the Slice” that was launched in early 2020. The purchase of stock slices, referred to as fractional share trading on the Robinhood platform, was made available to all Robinhood users in 2020, as well. There are other brokers that also offer stock slices and fractional trading, and this initiative has continued to gain traction in the investment world in recent years.

Final Points

Fractional shares and stock slices are the outcomes of various corporate transactions and investment strategies that also provide investors with a low-cost way to invest in a variety of stocks, effectively eliminating high stock prices as a barrier to investing. For example, buying one share of Amazon comes with a $3,492 price tag (as of 10:42 AM on 6/23/2021), but purchasing a slice of a share gives an investor the ability to still own some of the equity without the pressure or need to put in the high-ticket price for a full share. Investing in stock slices and fractional shares provides investors with a prudent way to diversify their portfolios by spreading investment risk across multiple companies versus purchasing whole shares of fewer companies, all for the same dollar amount.