What Is a Fractional Share?

Post Date : February 25, 2025

What Is a Fractional Share?

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

A fractional share represents a portion of a stock that is less than one full share. These fractional shares commonly arise from corporate actions such as stock splits, bonus issues, or mergers. Unlike whole shares, fractional shares cannot be traded directly in the stock market.

1. Stock Splits or Bonus Issues:
   When a company undertakes a stock split or issues bonus shares, fractional shares can result if the number of shares allocated to shareholders is not a whole number.

Example:
An investor holds 9 shares of ABC Ltd., and the company declares a 3-for-2 stock split.

• The investor would receive 4.5 additional shares (9 × 3 ÷ 2 = 4.5).
• This increases their total shares to 13.5.
• However, companies typically round up fractional shares to the nearest whole number, so the investor may receive 14 shares instead.

1. Mergers or Acquisitions:
   Fractional shares may also result from an unequal share swap ratio during a merger or acquisition.

Example:
An individual owns 29 shares of ABC Ltd., which merges with XYZ Ltd. XYZ Ltd offers 1 share for every 5 shares of ABC Ltd (1:5).

• The investor receives 5 full shares of XYZ Ltd (29 ÷ 5 = 5 shares).
• This leaves a balance of 4 shares in ABC Ltd., which translates to 0.8 fractional shares in XYZ Ltd (4 ÷ 5 = 0.8).

Can Fractional Shares Be Sold?

Fractional shares cannot be sold directly in the stock market. Instead, companies appoint a trustee or an authorized entity to buy back these fractional shares from shareholders. The proceeds from the sale are then credited to the shareholder’s linked bank account.

Key Takeaways

• Fractional shares result from corporate actions such as stock splits, bonus issues, or mergers.
• These shares cannot be traded directly in the market.
• Companies round up or buy back fractional shares, and the cash equivalent is credited to the shareholder’s bank account.

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