Fractional shareholding allows a person to purchase a piece, or a fraction of a share. For example, if one share costs KSh 500, a person could buy a proportion of that say for KSh 250 while another person buys the remainder for KSh 250. Each of them owns a fraction of the whole share. With fractional share ownership, a person could own a piece of a high-profile company that has expensive stock prices.
Fractional shares can work in different ways. In Canada, for example, the broker determines when a fractional buy or sell order is sent to the market. A broker bundles or aggregates orders to buy and sell fractional shares throughout the day. The broker then executes these bundled orders at one time during the day. The execution price depends on the time the broker trades the stock.
The Nairobi Securities Exchange (NSE) recently announced the introduction of fractional investing in Kenyan stocks. The Hisa App got the first nod from the Capital Markets Authority (CMA) and the NSE to facilitate fractional investing, with the approval opening the market and other brokerage firms for fractional trading.
Advantages of Fractional Share Ownership
A high entry barrier for some stocks has locked out investors who struggle to raise the minimum purchase cost. Fractional Share Ownership will allow smaller investors to buy shares with less money than previously required.
Initially, owning a company asset is a lot of paperwork and is a time-consuming procedure. According to experts, fractional ownership platforms make investing easier because all essential documentation and information are already available online and can be accessed from anywhere.
Fractional share ownership is a cost-effective investment. It provides investors with all of the advantages of owning company stocks and assets without paying a large sum of money upfront. Investors benefit from the company stock appreciation in addition to the continuous flow of revenue.
Shortcomings of Fractional Ownership
Companies with high share prices may see their prices inflated due to all the investors who can now buy their shares. Stocks with inflated prices often make for poor investments while a high price on a stock does not mean it’s a good investment.
If you own a very small fraction of a share, your broker may keep your dividend. For example: In cases when your fraction of a stock entitles you to less than KES 100 in dividends, you may not receive any dividend, and that portion could be a meaningful percentage of the stock’s value.
Should companies and individuals embrace fractional share ownership?
Fractional shares are worth it for businesses and individuals if they want to attract investors with little money in order to give them access to some expensive shares they wouldn’t normally be able to buy. They’re also powerful tools for diversifying an individual’s investment portfolio very quickly.
However, fractional shares aren’t worth it for people just using them to buy shares in large, trending companies without understanding the fundamentals of the investment.
