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During the summer, you might find some fruit vendors selling watermelons by the slice. Have you ever wondered why they do so? Selling by slice increases the affordability of watermelons for many customers and helps improve footfall at the fruit vending stall. Besides affordability, selling by slice also offers more flexibility to buyers. They can buy only as much as they want to consume. 

Cut across to stock markets, investors often face this watermelon dilemma. Take this example. 

Mohit has an investable corpus of Rs 1 lakh and wants to invest in at least 3-4 companies. One of them is MRF—a stock that commands a price of over Rs 1 lakh a piece. Now how do we solve this watermelon dilemma? Well, fractional shares come to the rescue. They do the job of watermelon slices.

What are fractional shares?

Fractional shares allow you to buy less than a share of a company and still become a shareholder. In India, fractional shares aren’t allowed at present. Although the market regulator is keen to introduce the fractional share feature to Indian investors, the present laws will have to be amended. But the good news is that deliberations are underway. 

How do the buying and selling of fractional shares happen in developed markets?

In developed markets such as the US, you can buy stocks for as little as USD 1. Execution typically happens through a special type of trade order, which gives the broker discretion about the time and price of execution. In other words, brokers become dealers and distributors of fractional shares and the transaction price need not be disclosed to the public.  

Advantages of fractional shares

  • Make ownership of pricey companies affordable 
  • Improve liquidity on the counter 
  • Offer portfolio diversification benefits 
  • Make the ownership pie of a company more diversified 

Limitations of fractional shares

  • Usually, a market cap filter applies to fractional shares 
  • The fractional share market may not always offer liquidity
  • The success of the market for fractional shares hinges on good broking practices
  • In fractional shares, the voting rights of shareholders might be constrained

In brief

Fractional ownership is definitely a development that should be tracked closely. As and when trades in fractional shares are introduced in India, liquidity on high-value stock counters may improve and their shareholder base might become more broadbase. Keep reading this space for further updates. 

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