What is a fractional share?
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. Fractional shares cannot be traded in the market and cannot be bought or sold.
If an individual holds 9 shares of ABC Ltd and the company declares a 3-for-2 stock split, they will be eligible to receive 4.5 extra shares, which would increase their total number of shares to 13.5. However, it's common for companies to round up to the nearest whole number of shares in such scenarios so that they might end up with 14 shares instead.
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, shareholders may receive fractional shares of the new company.
Assuming an individual holds 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, the individual would only receive 5 shares (5*5 = 25) of the new company XYZ, leaving them with 4 shares of the old company ABC (29-25). As a result, the individual would be entitled to a fractional share of 0.8 (4 shares / 5 = 0.8) of XYZ.
Can fractional shares be sold?
It is not possible to sell fractional shares in the market. Instead, the company appoints a trustee to buy back the fractional shares from investors, and the proceeds are credited to the primary bank account.