When you receive a statement of your investment in a stock, you might see a fractional share listed as well as whole shares. This is very common if you participate in a dividend reinvestment plan, or DRIP, offered by a company. Don’t dismiss those fractional shares. If a company pays regular dividends, over time the value of fractional shares can add up to hundreds of dollars when you sell the shares.
Companies offer DRIPs to encourage shareholders to add to their investment in the company’s stock. A company also reduces the amount of money it pays out when shareholders elect to reinvest dividends instead of taking cash. When you participate in a DRIP, the shares you buy are credited to your account. Often, companies make this a better deal by making DRIP participation free so you acquire more shares without paying any commissions or fees.
Most of the time, the amount you receive as a dividend won’t divide evenly to buy only whole shares with nothing left over. Let’s say you reinvest a $150 dividend payout and the stock has a market price of $40. That’s enough to buy 3.75 shares. The company credits your account with a 0.75 fractional share. At the next dividend date, if the same thing happens you will be credited with another 0.75 share. The fractional shares are added together, so you end up with another whole share and a 0.5 fractional share left over.
Selling Fractional Shares
When you sell all of the shares you own of a stock, you are paid the market price for each whole share plus a proportional amount for any fractional share. Let’s say you own 125.7 shares of a stock and sell at a market price of $40 per share. You get $40 per share for the 125 whole shares plus 0.7 times $40 for the fractional share, or $28. Your total sale proceeds are therefore $5,028.
Other Partial Share Causes
Several types of stock transactions can generate fractional shares besides dividend reinvestment. A stock split may result in your account being credited with a fractional share. Some online brokers even offer the option of buying fractional shares. Finally, when a company is acquired by another firm and the company’s stock is replaced with shares of the acquiring firm’s stock, you are likely to receive a fractional share. However, in a buyout it’s not uncommon for the acquiring company to pay you the cash value of the fractional share instead of crediting your account.
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