What is a fractional share?
What is a fractional share? Find a clear answer in this FAQ by 021 Trade.
1. Stock Splits
When a company announces a stock split, shareholders may end up with fractional shares.
Example:
An investor owns 15 shares of Reliance Ltd. The company announces a 3-for-2 stock split.
- The investor receives 7.5 additional shares
- Total shares become 22.5
Since fractional shares are generally not issued, the company may round it off, and the investor may receive 22 shares.
2. Mergers
Fractional shares can also arise when companies merge and the share exchange ratio does not result in a whole number.
Example:
- An investor holds 32 shares of AAA Ltd
- AAA Ltd merges with BBB Ltd
- Exchange ratio: 1 share of BBB Ltd for every 5 shares of AAA Ltd (1:5)
Calculation:
- 32 ÷ 5 = 6.4 shares
- Investor receives 6 shares
- Remaining 0.4 becomes a fractional share
What happens to Fractional Shares?
Fractional shares cannot be sold directly in the stock market. Typically:
- The company appoints a trustee or broker
- These fractional shares are aggregated and sold
- The sale proceeds are credited to the shareholder’s bank account
