Whether you’re an investor or simply someone interested in the stock market, chances are you’ve come across the issue of super-expensive stocks. For instance, the Class A shares of Berkshire Hathaway trade for over $400,000 a share. That’s roughly half a million dollars for a single stock!

Similarly, companies like Google or Amazon trade for thousands of dollars a share. This is why it’s difficult for beginners to buy into these companies while maintaining a diversified portfolio.

But a recent innovation has made investing super accessible. We’re talking about fractional shares. Keep reading to know what they are and how they work:

What is a Fractional Share?

Investors are often told to buy a slice of the pie. But what if you could buy a slice of the slice? That is exactly what a fractional share is. 

A fractional share is a portion of a single share of stock or ETF (Exchange-Traded Fund). In simple terms, investors can buy a piece of a stock, instead of the whole share. For example, if a stock costs $1,000, you can invest $200 to get 1/5th of a share. This strategy allows you to gain exposure to your favorite companies with very little money up front.

How a Fractional Share Is Formed

Fractional shares come about in a number of ways. Here’s a brief breakdown:

Dividend reinvestment plans

This is the historic way of owning fractional shares. A dividend reinvestment plan is offered by a corporation or a brokerage, allowing investors to use the dividends they receive from the company to purchase more shares. As a result, investors don’t have to wait to accumulate the full amount first. 

Stock splits

Investors are also left with fractional shares when a company carries out a stock split that results in an uneven number of shares. For instance, a company may complete a 3-for-2 stock split, giving investors a third share for every two shares they already own. 

If an investor owned an odd number of shares, they would likely end up with a fractional share.

Mergers and acquisitions

Fractional shares are also created during mergers and acquisitions (M&A) activities. 

Let’s say two companies have merged. The share exchange ratio may result in shareholders receiving a fraction of a share of the new company.

How to Trade Fractional Shares

The only way to trade fractional shares is through a major brokerage firm. They will join your share with other fractional shares until a whole share is attained.

While many experts believe that fractional shares are hard to sell, it is not always the truth. A reputable brokerage firm treats fractional shares the same as traditional stocks. 

Benefits

The most standout benefit of fractional shares is accessibility. 

Many brokers, such as SoFi, allow you to buy fractional shares for as little as $5. The best part? Your fractional share will receive the same percentage movements as the whole unit. 

You can access more than 4,000 stocks and ETFs for fractional share trading, including Google, Facebook, Amazon, and Tesla.