You will be able to explain how fractional shares are held and what rights they may lack.
Rachel's cousin wanted to start investing in a US company whose shares cost several hundred US dollars each. With S$200 a month, she could not afford one share. Her app offered to sell her 0.3 of a share instead, and she bought it without a second thought. A year later she wanted to move her account to another broker and found that the fractions could not come with her.
Fractional shares are useful. They also work differently from whole shares in ways most apps do not explain on the buy screen. This lesson covers what you actually own when you buy one.
When you buy a whole US share through a broker, you hold it in a nominee or custodian account, as lesson 1.1 described. The share exists as one unit, held for you within a pooled account.
A fraction is different. Stock exchanges trade whole shares. So when you buy 0.3 of a share, the broker usually buys or already holds whole shares itself and records in its own books that 0.3 of one of them is yours. What you own is a claim on part of a share that the broker holds, and the only record of that claim is in the broker's own books.
That structure is legitimate and common. But it depends more on the broker's own records and terms than a whole share does. The broker's fractional trading terms, usually a separate document or a section of the client agreement, describe exactly how fractions are held. Different brokers do it differently.
Because a fraction exists only in the broker's books, it often cannot be transferred to another broker. Transfer systems between brokers move whole shares. When Rachel's cousin asked to move her account, she was told the whole shares could go but the fractions would need to be sold first.
Selling first has costs. There may be a commission, a currency conversion if the proceeds are converted, and the spread. If the price has fallen, she sells at a loss she did not choose to take. And she is out of the market until she buys again at the new broker.
This connects to the transfer-out route you recorded in lesson 1.4, Check your broker's licence and custody set-up. If most of a holding is in fractions, your exit route is weaker than it looks.
Shareholders of US companies can usually vote at company meetings, through the custody chain. For fractions, it depends on the broker. Some pass on voting for fractions, some aggregate them, some do not offer voting on fractions at all.
Corporate actions vary too. Dividends on fractions are usually paid in proportion to the fraction held, so 0.3 of a share earns 0.3 of the dividend, with withholding taken as in lesson 3.1. Stock splits, mergers and spin-offs can produce fractions of new shares, and brokers handle those under their own rules, sometimes by paying cash in place of a fraction. The fractional trading terms set this out.
The case for fractions is strongest when a single share costs much more than you invest at a time. Without fractions, someone investing S$200 a month into a share priced at several hundred US dollars would have to save up for months and then buy in one lump, or put the money into something else entirely. Fractions let a small regular amount go into that share on the day you choose.
For a broad index ETF whose units cost far less than your monthly amount, fractions matter less. You can buy whole units and hold a small cash remainder until next month.
Fractions also interact with lesson 2.4, Price the full cost of one US trade. If your broker charges a minimum commission, a small fractional purchase can cost a large percentage of its value. Fractions solve the problem of share price. They do not solve the problem of fixed costs on small trades.
Rachel's cousin did not do anything wrong. She used a feature that suited her, without knowing its limits. The fix was not to stop using fractions. It was to read the fractional trading terms before relying on them, and to know which holdings could move if she ever needed them to.
Find the fractional share terms for your broker, usually linked from the help pages or the legal documents section of its website. Read how fractions are held, whether they can be transferred, and how dividends and corporate actions on them are handled, and write down the answers as the activity asks.
Read your broker's fractional share terms and write down how fractions are held, whether they can be transferred, and how dividends on them are paid.
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