What is a fractional share?
A fractional share refers to a unit of stock that is less than one full share. Fractional shares arise due to stock splits, bonus shares and similar corporate actions. Fractional shares are not traded in the markets and hence can not be bought or sold in the market. To know more about corporate actions, check out this chapter from Varsity.
Suppose you have 9 shares of ABC Ltd, and the company announces 3 for 2 stock split, which means for every 2 stocks held, you are entitled to receive 3 shares. Therefore in this case you are entitled to receive 4.5 additional shares for the 9 shares you hold. After receiving the 4.5 shares, your total number of shares would 13.5.
Most companies tend to round up to the nearest whole number of shares when fractional shares occur. In this case, ABC Ltd can choose to round up 0.5 shares and leave you with 14 shares.
Fractional shares also arise when a company merges with another firm and the shares held by shareholders are unequal to the share swap (i.e. exchange) ratio fixed for the merger.
Suppose you hold 29 shares of ABC Ltd, which has merged recently, and the new company (XYZ Ltd) comes out with an offer to provide the stock of XYZ in a proportion of one stock for every five stocks held (1:5). In this case, you can get only 5 shares(5*5 = 25) of the new company XYZ, while the remaining 4 shares of the old company ABC remains(29-25). In this case, you will be eligible for a fractional share of 0.8 (4 shares / 5 = 0.8) of XYZ.”
Can you sell fractional shares?
Since the fractional shares don’t trade in markets the company appoints a trustee to buy the fractional shares. The trustee then buys back those fractional shares from the investors and the proceeds are then credited to the primary bank account.