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Typically if I buy a stock I buy the stock from some guy selling the stock. If I own AAPL I receive a ~2% annual dividend payout which I choose to reinvest automatically.

  1. Who am I buying these full and/or partial shares from?
  2. Does this purchase impact stock market prices (e.g. in the form of outstanding shares)?
  3. When I sell out of the stock the partial shares are paid out according to the sell price of the full shares. The buyer did not purchase any partial shares from me. Who absorbs this cost?
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  • A country tag would be useful as rules may be different in different countries. – user9722 Sep 29 '15 at 22:10
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Many brokers administer their own dividend reinvestment plans. In this case, on dividend payment date, they automatically buy from the market on behalf of their reinvestment customers, and they administer all fractional shares across all customers. All of your shares are in the broker's street name anyway, the fractional share is simply in their account system.

The process is well documented for several common online brokers; so any specific questions you may have about differences in policies or implementation should be directed to your broker:

https://us.etrade.com/e/t/estation/help?id=1301060000

https://www.tdameritrade.com/retail-en_us/resources/pdf/TDA208.pdf

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    This may be the caes for the US but it is not the case in Australia. Dividend Reinvestment is mainly provided by the company you own the shares in, so the company itself will issue you with the additional shares istead of a dividend payment. Plus they do not issue partial shares. – user9722 Sep 29 '15 at 22:09
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As far as I know, it has the same price, and effects on the market, as any other transaction...

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In order:

  1. A seller of the stock (duh!). You don't know who or why this stock was sold. It could be any reason, and is of no concern of yours. It doesn't matter. Investors (pension funds, hedge funds, individual investors, employees, management) sell stock for many reasons: need cash, litigation, differing objectives, sector rotation, etc. To you, this does not matter.

  2. Yes, it does affect stock market prices: If you were not willing to buy that amount of shares, and there were no other buyers at that price, the seller would likely choose to lower the price offered. By your purchase, you are supporting the price.

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The Brokerage firm will purchase shares for the dividend paid in a omnibus account for the security of the issuer and then they will distribute fractional shares among all their clients that chose Div Reinvest. They will only have to buy 1 extra share to account for the fractional portion of what they allocate.

The structure of the market does not permit trading of fractional shares. There is generally not any impact to the market place for Div Reinvest with the exception of certain securities that pay large dividends that are not liquid. sometimes this occurs in preferred securities where a large amount of Div reinvestment could create a large market order that has market impact. Most brokers place market orders for the opening on the day following the payment of the dividend.

When you sell the fractional portion same process as full shares are sold into the market and the fractional if traded between you and the brokers omnibus account. if it creates a full share for the broker (omnibus has .6 shares and you sell him .5 they would likely flip that out to the street with the full share portion of your order.

This would not have impact to outstanding shares and all cost are operational and with the broker handling the Div reinvestment service.

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