Fractional shares: what you own, voting, transfers and costs

A slice of one share

Fractional share trading lets you invest an amount of money instead of buying whole shares. Moneysmart, the consumer website of Australia’s securities regulator ASIC, gives the arithmetic: “if a company’s share price is $100 and you invest $10, you may be able to buy one tenth of a share instead of a whole share.” That opens up expensive shares and makes small, regular purchases easier. The same page names the catch: fractional trading “can also affect your rights as an investor”.

Who holds the share

When you buy whole shares directly, ASIC explains, they are generally held in your name and come with the rights of a shareholder. With fractions, “the shares may be held on your behalf by the trading platform or by a custodian, in a shared account.” Depending on the platform, you might:

• directly own a fraction of a share; or
• hold your investment through a pooled or custodial arrangement.

The platform’s terms say which structure applies and who the custodian is. Read them before you buy, not when you want to leave.

What can be different

ASIC lists four points where a fractional holding may differ from shares you own directly:

• Voting: “You may not have the same voting rights as someone who owns shares directly.”
• Corporate actions: your ability to take part in shareholder activities may be different.
• Transfers: “You may not be able to transfer your investment to another platform in the same way that you could transfer directly owned shares.”
• Prices: the price you get for a fractional order “may not always be the same as the market price at the moment you place your order”.

ASIC’s own example shows why transfers matter. An investor who wanted to move to another broker was not allowed to transfer the fractional part of her share, so the only way out was to sell it — paying a fee and capital gains tax on her profit — and reinvest through the new broker.

Fractions that are not shares

In the European Union, some firms have sold derivatives that follow the price of a fraction of a share. In March 2023 ESMA, the EU securities regulator, stated that “derivatives on fractions of shares are not corporate shares, and therefore firms should not use the term fractional shares when referring to these instruments”, and that firms “should make clear to the investor that they are buying a derivative instrument.” With such a product you hold a contract whose value follows the share, not the share itself, and ESMA adds that these derivatives are complex products. Check which of the two you are buying.

Costs to check

On top of normal trading costs, ASIC lists for fractional trading “different pricing than buying whole shares”, “FX fees when purchasing international shares” and “forced liquidation costs if wanting to transfer platforms”. Add any custody fee or monthly account fee: a fixed fee takes a bigger share of a small balance.

Before you start

• Will you own the fraction directly, or through a pooled or custodial account — and which company is the custodian?
• Is the product a share or a derivative?
• Can you vote, and how are dividends on fractions paid?
• Can you move the holding to another platform, or only sell it?
• What does a small order really cost once currency conversion is included?

ASIC also reminds readers that managed funds and exchange-traded funds “can also let you start with smaller amounts while spreading your money across many investments”; our guide to ETFs explains how they work.