If you haven't dealt with them before, the idea of partial shares in a company may sound bizarre. But you can end up owning some if a company you invest in splits its stock, issues a dividend that you reinvest or goes through a merger. Nowadays, some online brokerages even let you normally buy and trade partial shares in a company. Other brokerages will only let you sell them when you sell all of your stock in that company and may charge you a fee for dealing with them.
Depending on the specific brokerage you are using you may be able to buy and sell partial shares as if they were normal shares. Other brokerages may add on special fees for managing partial shares.
Where Partial Shares Come From
It's common to invest in stocks with an agreement to automatically reinvest any dividends paid out by the company into more of the same stock. But there's no guarantee that your dividends will allow you to buy an even amount of stock.
Similarly, companies will sometimes buy back a percentage of outstanding shares, or issue a stock split, replacing outstanding shares with a larger quantity of shares. Similar things can happen in a merger, if one company buys another by swapping shares of the acquired company with a certain number in the company doing the buying.
If these transactions result in, say, every two of your shares being replaced by three new shares, but you own an odd number of shares, you might end up with partial, also known as fractional, shares.
Companies and brokerage firms sometimes avoid this issue by issuing cash at market value instead of partial shares, in which case you'll likely have to pay capital gains tax as if you had sold your partial shares immediately.
Trading Fractional Shares
Some online brokerages actually encourage customers to deal in partial shares of stock or other investments like exchange-traded funds or cryptocurrencies such as bitcoin. This can help smaller investors still find a way to put money into stocks, funds or other investments with high prices even if they don't have the funds to buy full shares.
As with any investment decision, it's usually good to take into account the total commission you'll pay to buy and sell partial shares, which can sometimes make it less advantageous to make relatively small investments. Different brokerages charge different fees for different situations, so it can be worth shopping around.
Some brokerages may charge you an extra fee for liquidating partial shares as opposed to whole ones, since they can be a pain to deal with and often have to be combined with other partial shares to sell. You may also not be able to transfer them to another brokerage account and may have to wait for them to be liquidated if you want to close out your account.
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.