What is a Fractional Share?

01 March 2017

If you were to put your cash into an investment fund, it’s actually possible that not every dollar and cent is being invested. How is that possible? Well, if you or your wealth manager wanted to invest RM1,000 into shares that cost RM300 each, you’d be able to buy 3 shares. What would then happen to that extra RM100? Often, that RM100 couldn’t go towards that same stock. Instead, that RM100 would have to be invested into other securities, or sit in cash.

This approach can be inefficient because it doesn’t allow you to invest in the shares you want to invest your money into, nor does it guarantee that every cent will be invested.

Enter fractional shares 

Fractional shares are portions of shares that can be as precise as 1/10,000th of a share. With such precision, you can invest every dollar and cent exactly where you want to in order to optimise your portfolio and maximise your invested money. In the example above, this would mean that you could have bought 3.33 shares at RM300 each, investing your full RM1,000.

Portfolio managers determine a portfolio’s ideal balance of assets, also known as an asset allocation, by considering what the investor wants to achieve, his or her timeline to achieve the financial goal, and his or her risk tolerance. Fractional shares allow the portfolio manager to maintain the balance that will most likely allow the investor to reach his or her goals as a result of the risk and return balance achieved through diversification and exposure to various types of assets.

Why are fractional shares important?

Fractional shares allow portfolios of all sizes to achieve high levels of diversification.

For example, even with a portfolio of RM500, we can diversify the portfolio by combining fractional shares of 10 ETFs, giving you exposure to more than 10,000 securities.

For monthly contributions of just about any amount, we can offer continuous monthly investments in 10-12 ETFs that then provides exposure to 10,000+ securities per month. And this is only possible because of fractional shares. Otherwise, you would get to invest in one or two ETFs, and therefore have lower diversification of overall securities.

Learn how StashAway strategically uses fractional shares here.

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