"Fractional share" is not just a fancy term that indicates something misleading. It is in fact, very straightforward. A fractional share is indeed a partial share of a company. This is great because when the company does well, that fractional share will experience the growth. However, it will also experience the downside of every drop in stock price.
Purchasing fractional shares through a brokerage account such as Robinhood is not the only way to obtain fractional shares. When a company has a reverse split of its stock, its investors often receive only fractional shares depending on their ownership. However, if this is the case while investing in Robinhood, you'll receive the cash equivalent of any fractional (non-whole) share amounts resulting from the split in lieu of shares.
Fractional shares are also granted when investors are involved in a DRIP (Dividend Reinvestment Plan). In this situation, if you have opted to reinvest a dividend received, that dividend will be used to purchase a share in proportion to the dollar amount received and the current stock price.
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With Robinhood, you can buy fractions of whole shares if the going rate is just too high. The amount of ownership you have of one stock will be in proportion to the amount of money you paid for the stock. For instance, if you paid 10% of the selling price, then you will own 10% of 1 share.
Because fractional shares are quite a popular feature, Robinhood has enacted some restrictions that investors should be aware of before jumping in.
Investors should know that with Robinhood they can purchase a fractional share as small as 1/1,000,000th of a share. That makes Berkshire Hathaway Class A shares worth a cool $300,000 accessible for as little as $0.30.
However, Robinhood has a minimum transaction of $1.
Fractional shares with Robinhood are also only available as good-for-day (GFD) market orders. This means that if the market is closed, the transaction will not be completed.
Not all stocks are available for fractional shares. In fact, Robinhood requires that the company have a market cap of at least $25M. This won’t be hard to do especially if the stocks you are wanting to split are expensive.
No need to do your research beforehand on this point. Robinhood will tell you that the fractional share purchase is not possible before the purchase order is submitted.
You might be curious about your rights as a holder of fractional shares. In terms of votes and dividends, you will still be eligible to participate, but of course, the percentages hold true. You will receive a fraction of the dividends as you only own a fraction of the stock. The same holds for voting rights.
Transfers are trickier with fractional shares. Robinhood explicitly states that they will not transfer fractional shares. If you initiate a transfer out of Robinhood, your assets will be sold, and you will receive the resulting cash.
This only applies to a full transfer. If you only are intending to transfer a portion of your portfolio is Robinhood, then your fractional shares will remain in the same state.
In summary, fractional shares are an amazing tool that Robinhood (and many others) offer to the investor community. When it makes sense with your goals and portfolio, you should absolutely use them to your advantage.
There are several brokerage firms that offer fractional shares so be sure to do your research before picking a platform. Just because one account offers fractional shares does not necessarily mean that is the correct platform for you.
All things considered, Robinhood is a great platform for these reasons listed above and many more. If you are interested in learning more about what else Robinhood has to offer check out our full Robinhood review here.