Fractional shares are a type of stock ownership, providing investors with an affordable way to diversify their portfolios. They are becoming increasingly popular due to the rise of commission free trading, with some brokers waiving fees for fractional shares. Fractional shares allow people to invest a fraction of the full share price instead of the full amount.

Fractional shares can be created in a variety of ways. One of the most common ways is through a stock split. Many companies choose to split their stock in order to make the company more attractive to investors by lowering the price per share. This means that a person who owns one full share of a stock can end up with multiple fractional shares after a split.

Mergers or acquisitions are another way fractional shares are created. When a publicly-traded company is acquired, stock in the company can be exchanged for stock in the acquiring company at a predetermined ratio. These stocks then become fractional shares.

Investors can also end up with fractional shares if they are reinvesting their dividends. If a person has invested in a dividend-paying stock and opts for dividend reinvestment, it is possible for the amount of the dividend to leave the investor with fractional shares.

Capital gains distributions can also lead to fractional shares. This can happen if the distribution amount is not enough to cover the cost of a full share of the security.

Lastly, dollar-cost averaging also creates fractional shares. This investing technique involves investing a set amount of money into the market at regular intervals. When an investor uses dollar-cost averaging, they can sometimes buy a portion, or fraction, of a single share.

Fractional shares have many advantages, but keep in mind that there are also a few drawbacks. Fractional shares do not trade on the open market and can only be traded through major brokerages. There may also be a transaction fee for selling fractional shares. Additionally, since the prices of fractional shares fluctuate in the same way as full shares, there is still the potential for gains and losses.

Despite these drawbacks, fractional shares are an attractive way to invest in the stock market. They allow investors to build up their portfolios in a cost effective, diversified way. With the rise of commission-free trading, fractional shares have become even more attractive to investors, allowing them to invest smaller, more manageable amounts of money.