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Fractional shares are subdivisions of one company share, for example, half of a Tesla share.
They exist because big-name stocks can come with individual share prices that are out of reach for many individuals, trading at hundreds or even thousands of pounds per share. Fractional shares mean it is possible to buy a stake in a company at a more affordable price.
Here’s what we believe investors need to should know about fractional shares and how to add fractional shares to their portfolio.
What are fractional shares?
Fractional shares are a relatively new development in investing. As their name suggests, fractional shares are portions or slivers of company shares and exchange-traded funds (ETFs) that are smaller than a whole, or single, share.
They offer the same benefits as whole shares, including the right to receive a proportion of any dividends per share that may be paid by the company.
Fractional shares typically appeal to investors with insufficient funds to buy whole shares in a company. This often applies to large US company stocks which haven’t carried out stock splits (explained in more detail below) to reduce the price per share.
However, investors may also receive fractional shares through:
- stock splits (see below)
- monthly investing: individuals investing a small amount (such as £25 a month) may be able to buy a fractional share but not a whole share. However, some investment platforms wait until accumulated funds are sufficient to buy at least one share, rather than offering fractional shares for regular investing
- dividend reinvestment: investors may choose to have dividends automatically reinvested, rather than being paid out in cash. In this case, the dividend payment is used to buy additional shares, which may result in fractional shares being purchased. Be mindful, future dividends are never guaranteed
- mergers & acquisitions: shareholders may also receive fractional shares in a merger or acquisition, for example, if shareholders are given one share in company B for every five shares they own in company A.
How do stock splits work?
High profile companies such as Amazon, Alphabet, Apple and Tesla have carried out stock splits in the last few years after share prices soared in the bull run in technology shares. Stock splits can help to widen the shareholder base by making shares more accessible to smaller investors.
In a stock split, shareholders are given a certain number of shares for every share they currently own. In Amazon’s last 20:1 stock split, shareholders were given one share for every 20 Amazon shares they owed. This reduced its share price from more than $2,000 before the split to $120 afterwards.
Amazon (AMZN) share price performance
The graph below displays the past performance of Amazon. Past performance is not a reliable indicator of future results.
Investments in a currency other than sterling, are exposed to currency exchange risk. Currency exchange rates are constantly changing which may therefore affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin.
By itself, a stock split will not alter the value of an individual holding in a particular company – it simply means that the individual’s holding is spread across a greater number of shares.
Which companies have the highest share prices?
Investors are most likely to buy fractional shares where the company has a particularly high share price, so let’s take a look at the companies with some of the highest share prices:
Top of the list by some margin is Berkshire Hathaway, with Warren Buffett’s investment company costing investors a staggering £422,000 per share.
With the exception of Swiss chocolatier Lindt & Sprüngli, all of the companies on the list are quoted on US stock markets. As a result, platforms offering fractional shares tend to offer US, rather than UK or European, shares.
Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.
What are benefits of fractional shares?
- size of investment: fractional shares allow individuals to invest small sums of money, particularly for those dipping their toes into investing for the first time. This potentially allows individuals to build an equity portfolio with a relatively small amount of money
- diversification: one of the basic principles of investing is diversifying a portfolio across different companies and sectors. Fractional shares could allow investors to spread their money across a broader range of investments
- ‘pound-cost averaging’: fractional shares could allow investors to drip-feed their money into equities over a period of time, meaning that they pay the average cost over that period. This can potentially be advantageous in falling markets.
What are disadvantages of fractional shares?
- limited selection of stocks: fractional shares may not be available for all companies and are not offered by many trading platforms
- liquidity: fractional shares may not be as easily tradeable, meaning that it may take investors longer to sell shares
- shareholder rights: holders of fractional shares may not be able to exercise voting rights on company matters although some trading platforms amalgamate the votes of multiple fractional shareholders
- transfers: some platforms do not allow the transfer of fractional shares to other platforms.
How can investors buy fractional shares?
Some, but not all, trading platforms allow individuals to buy and hold fractional shares. As a general rule, fractional shares are more typically offered by the zero-commission platforms instead of the more traditional platform providers from a stockbroking background.
As with normal shares, fractional shares are bought and sold ‘live’. Individuals will need to log onto their trading platform and enter the company name or ticker to receive a live quote, which they can then accept or decline. The minimum investment is usually between £1 and £10.
We’ve compared key features, including fees and the option of holding fractional shares, in our pick of the best trading platforms. Trading fees can be particularly important for fractional shares, as they can represent a significant chunk of the transaction value for smaller investments.
Can investors hold fractional shares in an ISA?
Traditionally, fractional shares have not been permitted holdings within a tax-efficient Individual Savings Account (ISA).
Tax treatment depends on one’s individual circumstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.
The key issue has been whether fractional shares count as qualifying shares under HMRC rules, which neither explicitly include, nor exclude, them. But the official line from HMRC was that fractional shares should not be housed in an ISA.
However, in the November 2023 Autumn Statement, Jeremy Hunt, then Chancellor of the Exchequer in the Conservative Party government, revealed his intention to change the rules so that fractional shares could benefit from the benign ISA environment.
In September 2024, following the General Election which brought Labour to power, HMRC is reported as confirming that this change will still take place, with the necessary legislation being prepared for the autumn.
Win for ordinary investors
Adam Dodds, ceo of Freetrade, said: “This is a victory for ordinary investors throughout the UK. Fractional shares enable customers with small and large portfolios to diversify their holdings much more easily than if they were only limited to holding whole shares.
“We’re pleased that the government has stood up for ordinary investors and acknowledged there is a need to update decades old ISA regulations that have simply not evolved with the market.”
Dan Moczulski, UK managing director of eToro, said: “The government has undoubtedly made the right decision in opening the door to fractional shares in ISAs. We are strong advocates of fractional shares and believe that not only do they reduce the barriers to investing, but allow people to get the exact exposure to a stock that they want, rather than having to invest what seems like an arbitrary amount based on share price.
“Crucially, fractional shares in ISAs also give people the freedom to withdraw the exact amount of money that they want from an ISA, rather than having to take out too small an amount, or too much, because they are limited to investing only in share price denominations.”
For investors considering investing in ISAs more generally, we’ve also produced a guide to our pick of the best ISA providers.
