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I've been trying to find out some more information about fractional shares, and how they work. I understand conceptually, you own x% of a share rather than x "full" shares, but I'm curious about how such a system is implemented.

As I understand it, in a "traditional" purchase of shares, the role of a broker is to act as an executor on your behalf, and does not hold any assets themselves. In the case of a fractional share, is this then not the case? For example, the broker holds the complete shares, and then just ensures that they keep an internal record of each partial owner in their system? So there would be no external record of partial ownership?

Thanks!

  • Even in a traditional purchase of whole shares, the broker holds the shares and keeps a record of each owner in their system. – prl Mar 26 at 1:16
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    What are these shares of? Stocks? Mutual funds? LLCs? – Harper - Reinstate Monica Mar 26 at 1:45
  • "and does not hold any assets themselves" this is actually the opposite of what "street name" brokerage title entails. You can find a brokerage that operates the way you stated, but know that it is not the default and most likely has higher trading fees. investopedia.com/terms/i/instreetname.asp – user662852 Mar 26 at 13:54
  • Ah, thank you. That's a helpful clarification. Fractional shares are therefore more or less internally consistent with with how full shares are treated then? – as646 Mar 26 at 13:58
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Major stock exchanges and major brokerage firms require that you buy whole shares. Some brokers are willing to buy whole shares of stock and divide them up for investors seeking fractional share positions.

Window Trading is where orders for the same stock are rounded up and purchases/sales are executed at specific times during the trading day. The broker holds the total shares in street name but the the fractional shares are distributed across accounts in house as book entry.

Window Trading is also common with DRIP web sites that purchase whole shares X times a month for investors opening a DRIP.

Another method is where the broker executes the the full share portion of the order on an agency basis and for the fractional share portion, they sell to you from their own account at NBBO.

There are some drawbacks to fractional shares but overall, they're minor (non transferable, not receiving a fraction of a dividend, higher commission in relation to the principal...)

  • Okay, so I'm not familiar with some of these terms. The final case was I think the case I was asking about -- by selling to you "from their own account at NBBO", that means that they are required to sell at whatever ask price the share has at the time of purchase (or a fraction of it in this case)? E.g. if I want to buy $100 of an AMZN share which costs $1000, the broker purchases a whole share, and then subsequently has to sell me 10% of a share, as opposed to deciding to instead give me, say, 8%. – as646 Mar 26 at 11:17
  • NBBO is a SEC regulation in the US that requires brokers to execute customer trades at the best available ask price when buying or selling securities. If the brokerage firm is selling you shares out of their own account, it must be at NBBO. I don't know what the internal workings of a fractional share broker are. Will they buy 1 share to sell you 1/10th of a share? Is there a tipping point? 7/10? 8/10? I dunno. I don't get what the 8% refers to. – Bob Baerker Mar 26 at 11:34
  • What I was getting at was basically if I want to buy $100 of a share, at the best available ask price I am therefore entitled to 100/1000 = 0.1 of a share. The broker cannot arbitrarily set a different value for a partial share where they resell at $1250, where I am then left owning 100/1250 = 0.08 of a share. Which seems to be what NBBO ensures they cannot do? – as646 Mar 26 at 13:57
  • Yes, that is correct. If share price is $1,000 when they transact for you, then that is the price that you will pay. There might be some issues with the fill price (higher or lower) if the broker is Window Trading. I know this occurs with DRIP plans but I don't know if that happens here. – Bob Baerker Mar 26 at 14:23
  • Great, thanks for the clarification. – as646 Mar 26 at 14:40

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