Investing on a Budget: Fractional Shares in the UK

A share is a small piece of a company that you can buy. 

But what are fractional shares in the UK and are they a good investment idea?

Let’s find out.

What Are Fractional Shares?

Fractional shares are a piece of a company’s share. 

Imagine this: A company pie is divided into slices called shares. Each slice can then further be divided into smaller parts. These latter parts are called fractional shares.

But, why buy a fraction share when you buy a whole share? 

Well, shares can be expensive, especially in big companies. For instance, to buy Amazon shares in the UK, you need more than £2,000. 

Fractional shares, on the other hand, make investing in these mega-cap companies more accessible for broader groups of people This way more investors can participate in the trading market and can buy more snippets from different companies to diversify their portfolios.

Where Can You Buy Fractional Shares?

Shares are traded on the open market and to purchase a fraction of them, you’d need a broker or share-dealing platforms where you can buy fractional shares. Some of them include Trading 212, Freetrade, and Capital.com. They also don’t charge any commission on the trades.

You can also purchase fraction shares on Revolut, Stake, and Wombat or obtain them through ETFs or Exchange Traded Funds on platforms like Wealthsimple and Nutmeg. 

Selling Fractional Shares: How Easy Is It?

You can sell your fractional share on the same platform you bought it from. However, your fraction needs to merge with other fractional shares to make a whole share before it can be sold. 

Depending on the demand, this might take some time. Some shares are highly sought-after and sell rather quickly. Others, usually from less popular companies, are not as desirable so, you’d have to wait. 

Can You Buy Fractional Shares in the UK?

Yes, you can buy fractional shares in the UK. Platforms like Capital.com, Freetrade, Trading 2012, Nutmeg, and Stake, and the rest, operate within the UK. 

While there’s nothing stopping potential investors in the UK from purchasing fractional shares, it can be challenging to buy such shares from British companies because there aren’t many options to choose from. 

The market of fractions is mostly dominated by American giants like Amazon, and Google’s parent company—Alphabet.

If you’re adamant about shopping locally, you might find fraction shares from Greggs—the Brits’ favourite pastry shop—as well as JD Sports and Ocado supermarkets on Wombat.

How Do Fractional Shares Work?

The good news is buying fractional shares is a simple process. If you’re a novice investor, follow these steps:

• Choose a stockbroker

Not every share broker in the UK offers fractional shares, so the first thing you’ll need is to find one that does.

• Create and fund your account

After you find a good platform, create an account and add the funding info so you can buy shares later on. 

• Choosing a fractional share

The next step is to pick a fraction share that you want to own. There are many to choose from so it’s best to do some research before you start buying.

• Decide how much you’re going to invest

Platforms usually calculate how big of a piece you can get with the amount you’re willing to invest. 

• Press ‘Buy’   

This one is self-explanatory.

How Are Fractional Shares Created?

Other than share dealing brokers purposefully dividing shares into smaller parts, fractional shares can also be created in three other ways.

Dividend Reinvestment Plans

These plans let you, as a shareholder, reinvest your dividends and buy additional shares to help you increase your overall equity in the company. However, if your payout isn’t enough for a full share with a fixed price, you can buy fractional shares with the amount you have. 

Stock Splits

Every once in a while, companies’ boards make an executive decision to issue more shares for their shareholders. They do this by breaking their existing shares into several smaller parts. This practice, called stock split, creates fractional shares. 

How and when they split the stocks is entirely up to them.  

Some companies may offer a 2-for-1 option, while others may split them into 3-for-2 share pieces. Apple, for instance, did a 4-for-1 forward stock split in 2020. The move created many fractionals which made it much cheaper to buy Apple shares in the UK and worldwide.

The practice of splitting stocks is considered harmless and doesn’t affect the company’s overall value or each shareholder’s part. 

Reverse Stock Splits

The traditional stock split that results in fractional shares is referred to as a “Forward” split. However, companies can issue a request for a Reverse split, too, to bulk up their share price.

For example, if a 4-to-1 reverse split takes place, shareholders with 8 shares will effectively have 2 large shares.

Mergers and Acquisitions

Stock splits are sometimes necessary. For example, it’s recommended practice when two companies merge into one to ensure both parties own an equal part.

Pros and Cons of Fractional Shares

Pros	Cons
Diversify your investment portfolio	Harder to sell
Start investing with little money	Additional fees
Buy into giant companies like Amazon	Limited selection
Invest any amount	Low dividends

Although, there are some legitimate drawbacks, the ability to partake in the stock market by owning small equity in a high-value company outweighs the negatives in most cases.

Why Are Fractional Shares A Good Investment Option?

Fractional shares have one important advantage over traditional share trading: you can buy them at a much lower cost. For example, a share of the Swedish company Lindt costs an upward of £8,000.

Those who cannot afford that can buy a fractional share at a much lower cost. They can also purchase fraction shares at several high-end companies and diversify their portfolio by holding little parts of equity from many businesses. 

The biggest advantage of diversification is that it can lower your overall trading risk and reduce the volatility of your shares’ price fluctuations. This, in turn, will increase your chances of profit. 

With fractional shares, diversification is more accessible—even investors with limited funds can buy fractions, of say Amazon or other shares from a UK company.

Additionally, Investing in stocks and shares can produce higher returns than cash in 90% of the cases and there’s a known principle that buying and holding on stocks might be beneficial for long term.

Note: The open trading market is ever-changing and share prices fluctuate constantly. The value of the Lindt share mentioned in the article may change accordingly.

Bottom Line

Buying fractional shares can be a great way to enter the investment market: it’s cheaper than traditional stock, beginner-friendly, and highly customizable. 

There are some drawbacks, like having to wait for your fraction share to merge as a whole to become sellable, but the process of trading with fractional shares in the UK is safe and relatively easy. There are many brokers to choose from and numerous businesses you can buy into, at a fraction of the price.