How does Fractional Shares Works?

Post Date : March 11, 2025

How does Fractional Shares Works?

Disclaimer: Investments in the securities market are subject to market risks. This content is for educational purposes only and does not constitute financial advice.

When MRF’s share price crossed a lakh in value, it made headlines. But how many investors in India can afford to buy an MRF share? Other expensive stocks in India, such as Page Industries and Honeywell Automation, are also trading above Rs 40,000. (Note: These prices are just examples while the blog is written and may fluctuate over the time.)

The reality is that most retail investors do not have a portfolio large enough to accommodate such high-value shares. Even with a portfolio size of Rs 5,00,000, holding these shares in large quantities could disrupt diversification.

The Solution: Fractional Shares

As per reports, the Securities and Exchange Board of India (SEBI) is planning to introduce the concept of fractional shares. This will enable investors to purchase portions of high-value stocks, making the stock market more accessible.

Benefits of Fractional Shares for Investors

• Accessibility: Investors can access high-priced stocks that would otherwise be unaffordable.
• Diversification: Fractional shares allow investors to spread their portfolio across multiple stocks, reducing risk.
• Cost-Efficiency: Funds can be allocated more effectively, leading to better capital utilization.
• Risk Management: Owning fractional shares reduces the impact of poor performance by a single stock.
• Rupee Cost Averaging: Investors can consistently invest fixed amounts at regular intervals, benefiting from price fluctuations.

Example:

An investor can create a portfolio of high-quality stocks by investing Rs 1,000 monthly. Without fractional shares, it would be difficult to achieve such diversification with small investments.

Benefits of Fractional Shares for Companies

• Wider Investor Base: More investors, including those with limited funds, can participate.
• Liquidity: Increased trading activity can improve stock liquidity.
• Market Capitalization Growth: A larger investor base and higher liquidity may enhance a company’s market value and overall sentiments.

How Do Fractional Shares Work?

Currently, India does not allow fractional share ownership under existing laws. However, in the U.S., fractional shares have been in existence for years.

In the U.S., brokers buy and hold full shares in their name. Investors can then purchase fractions of these shares through brokerage platforms. For example, if a stock trades at $100, an investor can buy a 0.5 share for $50. The broker holds the remaining shares in their account.

Can Fractional Shares Work in India?

Unlike the U.S., Indian brokers cannot hold shares in their name. This restriction prevents them from distributing fractional shares to investors. Without regulatory changes, fractional shares cannot be introduced in India in the same manner as in the U.S.

The Solution

One possibility is for companies to issue fractional shares directly. However, under the Companies Act, Indian companies cannot purchase, sell, or trade fractional shares. The law currently requires shareholders to subscribe to at least one full share.

To make fractional shares a reality, SEBI is working with the Ministry of Corporate Affairs to amend the law. If the necessary regulatory changes are made, Indian investors will be able to purchase fractional shares in the future.

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