A fractional share is a portion of a stock that is less than one full share and is typically a result of corporate actions such as stock splits or bonus shares. You cannot trade fractional shares in the market and cannot buy or sell them.
How fractional shares arise
Stock splits and bonus shares
If you hold 9 shares of ABC Ltd and the company declares a 3-for-2 stock split, you will be eligible to receive 4.5 extra shares, which would increase your total number of shares to 13.5. However, it is common for companies to round up to the nearest whole number of shares in such scenarios, so you might end up with 14 shares instead.
Company mergers
Fractional shares also arise when a company merges with another firm, and the share swap ratio is unequal to the number of shares held by shareholders. In such cases, you may receive fractional shares of the new company.
If you hold 29 shares of ABC Ltd, which has recently merged with another company named XYZ Ltd. Suppose XYZ Ltd offers one stock for every five stocks of ABC Ltd held (1:5). In this case, you would only receive 5 shares (5*5 = 25) of the new company XYZ, leaving you with 4 shares of the old company ABC (29-25). As a result, you would be entitled to a fractional share of 0.8 (4 shares / 5 = 0.8) of XYZ.
Can fractional shares be sold?
You cannot sell fractional shares in the market. Instead, the company appoints a trustee to buy back the fractional shares from you, and the proceeds are credited to your primary bank account.