Things to Know Before You Start Investing in Fractional Shares

Investing in the stock market was once seen as a privilege for those with significant capital. Today, innovations like fractional shares are breaking down these barriers, allowing investors to buy a portion of a stock rather than a whole unit. This has made investing more accessible, especially in high-priced stocks like those of multinational tech giants. In this article, we explain how fractional shares work, their benefits and limitations, and what to keep in mind before adding them to your portfolio.

Fractional shares represent a part of a full share of a company’s stock. Instead of buying an entire share, you purchase a portion based on the amount of money you’re willing to invest.

Example:

If a share of Company A costs ₹5,000, but you invest only ₹1,000, you will own 0.2 shares.

Fractional shares are made possible through platforms that pool and divide full shares into smaller units. These are typically available via:

• Brokerage platforms offering fractional trading
  

• Mutual funds or exchange-traded funds (ETFs) where fractional ownership is inherent
  

• Stock splits, mergers, or dividend reinvestment plans (DRIPs) that result in fractional holding.

Fractional shares can arise in several ways:

Stock Splits

When a company announces a stock split with non-even multiples (e.g., a 5-for-4 split), investors holding an odd number of shares end up with fractional parts (e.g., 7 shares become 8.75 shares).

Mergers & Acquisitions (M&A)

In mergers or acquisitions, share conversion ratios may result in fractional share allocations. For example, at a 5-for-3 conversion, 7 shares could convert into 4.2 shares.

Dividend Reinvestment Plans (DRIPs)

When dividends are automatically reinvested, the dividend amount may not cover a full share, leading to fractional share purchases.

Several factors are driving interest in fractional investing:

Accessibility

Investors can start with small amounts, making it easier for beginners or those with limited capital.

Portfolio Diversification

Fractional shares enable exposure to multiple high-value stocks, helping diversify portfolios without a large investment.

Participation in High-Growth Companies

It allows retail investors to invest in high-priced global stocks (like those listed on NASDAQ) without buying whole shares.

Flexibility

Investors can automate investments through SIPs in fractional amounts, promoting long-term disciplined investing.

While Indian stock exchanges do not natively support fractional trading, investors can access fractional shares in the following ways:

International Investing Platforms

Some brokers and fintech platforms offer access to US stock markets with fractional buying options.

Mutual Funds and ETFs

These offer indirect exposure to high-value stocks through fund units, which may be fractional in themselves.

SIP-Based Equity Investments

Some platforms allow you to invest in rupee-denominated SIPs, allocating units proportionally across a basket of stocks.

Note: Always check whether the platform offering fractional shares is regulated and compliant with SEBI or RBI guidelines for overseas investments.

Fractional shares offer several benefits, especially for new or small-scale investors. Key advantages include:

While fractional shares offer accessibility, they also come with certain limitations investors should be aware of, such as:

Limited Liquidity

Fractional shares may not be as easily tradable as whole shares, depending on the broker or platform.

No Voting Rights

Most platforms do not extend shareholder voting rights to fractional holders.

Brokerage Restrictions

Some brokers may restrict sale, transfer, or dividend reinvestment on fractional holdings.

Overseas Regulatory Risks

When investing in foreign stocks fractionally, you may face currency risk, taxation differences, and limited grievance redressal mechanisms.

Investors in fractional shares, whether domestic or international, should be mindful of the following tax considerations:

• India-Based ETFs or Mutual Funds: Taxed as per capital gains rules (15% STCG, 10% LTCG above ₹1 Lakh).
  

• International Stocks: Gains may be taxed under the LRS (Liberalised Remittance Scheme) and foreign capital gains laws.
  

• Dividend income from foreign stocks is taxable in India, but may be adjusted under Double Tax Avoidance Agreements (DTAAs).
  

Fractional investing is better suited for certain investor profiles based on capital, goals, and experience. Here’s a quick guide:

Consider the following key checks to ensure a secure and informed experience:

• Platform credibility and regulation
  

• Ownership structure and rights on fractional units
  

• Charges and fees on fractional trades
  

• Availability of tax documentation for reporting
  

• Ease of buying and selling shares
  

Fractional shares offer a powerful entry point into stock market investing for individuals who might otherwise be priced out of high-value stocks. While they bring increased accessibility and diversification, investors should evaluate platform credibility, taxation rules, and liquidity limitations before investing. As financial platforms continue to evolve, fractional investing may become a standard option for building inclusive and diversified portfolios.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.