I can't buy fractional shares, only integers. But I get some shares from my company as compensation and those are fractional all the time (like 1.7 shares). Also, when dividends are automatically reinvested, same thing - fractional shares.
Why is this? Why isn't fractional trading allowed and why is it possible when dividends are re-invested or when my company pays me?
Whether you can buy fractional shares is solely up to whatever broker you're working with (and potentially what type of account). There are plenty of brokers that will allow you to buy fractional shares. But, presumably, if your employer is depositing shares as compensation, they've picked the broker they're working with.
You could always open a new account at a broker of your choice that does support fractional shares.
Fractional shares are interesting in that they don't really exist.
Most companies (nearly all) are set up such that the smallest holding any entity can hold is a 'share'. This is really a hold-over from pre-computerization when no company was going to be able to keep track of 1000's of shareholders with 0.01 shares each.
This leads to the obvious statement:
Dollar to share conversions are always going to have some leftovers
Which leads to the next state:
If you are seeing partial shares, someone else holds the shares
In the case of renumeration or dividend re-investment the fractional shares (often as a dollar value) are likely held over until the next period when they can be re-attributed.
In the case of purchasing fractional shares from a brokerage, the broker holds the shares. What this means is that the brokerage will have a giant pool of shares, enough to cover all of the fractional shares their clients hold in a company and will then distribute the fractional rights to the 'holders'.
Depending on the brokerage the rights offered will vary:
But I get some shares from my company as compensation and those are fractional all the time (like 1.7 shares). Also, when dividends are automatically reinvested, same thing - fractional shares.
Why is this? Why isn't fractional trading allowed and why is it possible when dividends are re-invested or when my company pays me?
Inside the 401(k) system the company I worked for in the 1980's had fractional shares of company stock. In the pre-Enron days the company match was always in company stock. Since I was getting a match of 4% of my gross pay every two weeks, each of those deposits into the 401(k) from the company resulted in fractional shares. Then there were the quarterly 25 cents per share dividend each quarter. Again resulting in the awarding of a fraction of a share. This has been true with every 401(k) program I have been involved with.
This was possible because the system was splitting an integer number of shares among the thousands of employees.
My contributions into various mutual funds withing the 401(k) system also resulted in fractional shares.
It took decades for this to be made available within regular accounts, not everybody has done this.
Fidelity supports fractional stock shares. Last I knew it was in their phone app only and the web interface didn't allow it.
Fractional shares require the broker to be an intermediary because the market only deals in whole shares. Computers have certainly enabled a different mode of thinking but remember that the concept of stocks is well over four centuries old.
Whether the broker simply buys the .67 that you couldn't afford or finds an actual buyer is transparent to you and not something that most brokers like to get into. Stock splits and reverse splits are why you would end up with fractional shares.
Owning a fractional stock is a little like owning a fractional coffee cup.
We think of stock as an investment tool, but that's really more of a useful side effect of the real purpose: indicating ownership or stake in the business, where one share indicates one "vote" in how the company works. The business itself would not recognize a partial share, just like it makes little sense to only cast a fractional vote for an election candidate; you either vote for someone or not. The stock may also be used as a claim on dividend payments, where a fractional share means suddenly trying to pay out fractions of a penny. In a similar way, a fractional part of a coffee cup will have a hard time serving it's real purpose.
But now imagine if coffee cups were made of solid gold. In that case, people might start owning coffee cups that are never used for caffeination, but simply because the value of the material composing the cup can grow over time. Suddenly a fractional part of a coffee cup might make sense, because the material making up the cup is itself also valuable.
In the same way, you never actually "own" a fractional piece of stock. This is a fiction your broker manages for you. If your portfolio has fractional stock, then somewhere your broker owns an actual full share of stock to cover your fractional portion. And if we talk about coffee cups again, instead of cutting a real coffee cup into many pieces the whole cup will rest with one person, who must then keep track of the other partial owners of the cup.
This can work for large brokers with many clients. If 20 clients each own 0.05 of a share, the broker only needs one full share to cover all of them. It's also possible the broker merely took your money and never actually purchased a covering share; instead they will cover it at sale time, possibly even by buying it out themselves. It can be easier and simpler to ensure adequate general cash reserves than a very specific portfolio of stocks who's only purpose is covering many fractional investors. However, they have to be careful about this, since prices can change wildly, and there are rules and regulations governing how certain class firms must manage this risk.
Sometimes allowing fractional shares is not worth the effort at all. One reason is certain stocks can price very high. For example, a single A-share of Berkshire Hathaway currently costs well over $400,000. No broker wants to cover a fractional amount of that stock for one investor, so brokers often need to have limits on this kind of thing. Any broker may also have limits that apply only to smaller accounts.
It sounds like the situation at hand is the broker is perfectly happy to hold fractional amounts of your employer's shares for your account, but doesn't want to deal with this for other stocks. This makes sense, as the employer is likely also a client. The broker will naturally have shares in the employer's stock, and and since all the employees will all have a shares in this one company, the broker need only hold a few shares of the one stock, which it does anyway, and they can cover the fractional amounts for all of the employees.
Fractional shares can be owned via mechanisms where some other party holds an integer number of shares, and you are entitled to a fraction of the profits of that some other party.
An example: Warren Buffett's Berkshire Hathaway has a single share that has a price of 468 700 USD. Today, there's also a cheaper class B but that's a fairly recent addition. Before class B shares, there was no reasonable way to own shares in Berkshire Hathaway for a small investor. Or was there?
Actually there was. It's a mutual fund the only purpose of which is to invest into Berkshire Hathaway. So the mutual fund holds an integer amount of stocks, and you own a fraction of the mutual fund. (I think Warren Buffet created class B just to kill those mutual funds that charged hefty fees.)
Today, most brokers offering fractional shares are actually not running mutual funds but rather different kinds of contracts where you are entitled to certain fraction of the returns.
Be sure to read the fine print if owning fractional shares. Actually, you should read the fine print always even if owning integer amounts of shares. It may be possible you are not the true owner of the shares you purchased. It's possible someone else owns the shares, and you just are entitled to a part of the returns. If the "someone else" goes bankrupt, you must be certain what rights you have. If you are the true owner of shares, your broker going bankrupt is just a minor annoyance. But if you aren't the true owner, that could be a disaster for you.
I never buy anything I don't understand. So I don't buy fractional shares. I don't buy any shares from a broker that offers the possibility to buy fractional shares (just in case I wouldn't be the true owner of shares). I also don't buy anything from a "free" broker, since they probably are using payment for order flow.
