How do fractional shares work?

Fractional shares, or as they are called in German, fragments, are an exciting topic in the financial world. Regardless of whether it's funds or stock splits - Fractional shares have their own advantages, which is why they are often used.

For many investors, they offer an attractive opportunity to invest in the stock market even if they don't have the necessary capital to buy an entire share.

Table of contents:

• What are fractional shares?
• Fractional shares in funds and ETFs
• Selling stock fragments - that's how it works
• Do fractional shares pay out dividends?
• Are fragments profitable?
• Benefits of Fractional Shares
• Disadvantages of fractional shares
• Fractional Shares vs. Exchange Traded Funds
• Fractional shares and private equity
• Buying fragments - how does it work?
• Tax aspects of fragments in Germany
• Risk management for fragments
• Fragments at NAO
• conclusion

What are fractional shares?

Fragments enable investors to Buying a fraction of a share instead of having to buy the entire share It is basically a smaller unit of an entire share. In other words, a type of unit of account that mathematically reflects the development of the share price.

Fractional Shares and Stock Splits/Reverse Stock Splits

Stock splits and reverse stock splits are mechanisms by which a company changes the number of shares it has in circulation without affecting the market value of the company as a whole. In a stock split, a share is divided into several shares, causing the individual price of the share to fall. Conversely, in a reverse stock split, multiple shares are combined into a single share, causing the price to rise.

Today, stock splits and reverse stock splits are carried out less frequently because the option of fractional shares serves the same purpose: they allow investors to invest in a company regardless of what the share price is. Over the years, many companies have done stock splits and reverse stock splits, to make their shares more attractive to investors. A well-known example is Apple, which has carried out several stock splits throughout its history.

For example, during a split in 2014, Apple did a 7-to-1 split, in which investors received six additional shares for each share they held. This means that if someone owned 700€ of Apple stock before the split, they had seven shares of 100€ each after the split.

Fractional shares in funds and ETFs

Fragments are not only available for individual stocks but also for investment funds and exchange traded funds (ETFs). Especially in the area of ETFs, many online brokers offer the opportunity to purchase fractions of shares. This allows investors to invest in ETFs even if they don't have enough capital to buy entire shares of ETFs.

This is particularly beneficial for investors seeking diversification. For example: If an ETF that tracks the S&P 500 index costs €300 per share, investors can invest a much smaller amount in the entire index using fragments. This process has also become very popular due to savings plans, as they always save an amount and not a fixed number of pieces.

Similar to individual stocks, investors can also receive dividends from ETFs and funds when they are distributed, and they are paid out in proportion to the size of their fragments. This provides an additional source of income and the option to automatically reinvest dividends, similar to a dividend reinvestment plan (DRIP) for individual stocks:

Fractional Shares and Dividend Reinvestment Plans (DRIPs)

Dividend Reinvestment Plans (DRIPs) are an exciting opportunity for investors to increase their returns over the long term. These plans automatically reinvest paid dividends into additional shares or partial shares of the company. In this way, investors benefit from a faster compound interest effect and a higher total return. In addition, DRIPs can make risk management easier as they allow investors to invest in a company steadily and systematically, rather than investing a large sum of money all at once.

Fractional shares in mergers & acquisitions (M&A)

Mergers and acquisitions (or the English abbreviation: M&A) can be complicated, especially when it comes to reflecting the value relationships between the companies involved. Partial shares may play a role here. They allow all investors to be treated fairly, regardless of how many shares they own. For example, in a merger, investors could receive 1.5 shares of the new company for every old share, which would be more complicated to manage without the option of partial shares.

Fragments vs. full stocks

Selling stock fragments - that's how it works!

Selling fragments works in a similar way to selling full stocks. Many brokers today offer the option to trade fractional shares. However, there is something to note that not all brokers support trading in fragments and that there can sometimes be delays in selling, as there is sometimes a wait until an entire share can be sold.

For example, it can happen that two investors each have to sell half a share so that another can buy a whole share.

Do fractional shares pay out dividends?

Yes, partial shares also pay out dividends, in proportion to the size of the share in the company. This means that even retail investors who only own fractions of shares share in the company's profits. The dividends are usually automatically credited to the investor account and can then be reinvested or paid out, depending on the investor's individual preferences.

Are fragments profitable?

The profitability of fragments depends on the same factors as full stocks: the performance of the underlying company, overall market sentiment, and other macroeconomic factors. The main difference is that the investor realizes only a fraction of the gains and losses, proportional to their share of the stock.

Benefits of Fractional Shares

• Accessibility: One of the biggest benefits is that investors need less capital to invest in high-priced stocks.
• Diversification: With lower capital investment, investors can diversify their portfolio better.
• Automated investing: Many platforms allow fixed amounts to be invested regularly, which often results in the purchase of fragments.

Disadvantages of fractional shares

• Restricted trading: Not all brokers offer trading in fragments.
• Liquidity: In some cases, fragments may be less liquid than full shares.
• Not real property: Since only one unit of account of the share is purchased, you are only mathematically presented as if you had purchased a share in the share, but you are not a real owner of the company.

Fractional Shares vs. Exchange Traded Funds (ETF)

While fractional shares offer a great opportunity to invest specifically in individual companies, Do ETFs offer the opportunity to diversify. An ETF can consist of dozens or hundreds of different stocks. As a result, risk can be better diversified. Partial shares and ETFs can also be combined to achieve even wider diversification, so investors can benefit both from the opportunities offered by individual stocks and from risk reduction through diversification.

Fractional shares and private equity

Private equity is generally difficult for the average investor to access, often due to high minimum investment requirements. But platforms such as NAO offer the opportunity to invest in private equity secondary funds by offering partial shares or “teli fund shares.” This enables investors to invest in this otherwise difficult to access market with a lower entry sum of just 1,000€.

Buying fragments - how does it work?

Many modern brokers now offer the purchase of fragments. The process is similar to buying full stocks.

Calculation example 1 - Fixed amount

Let's say you want to invest $50 in a stock that currently costs €200. For your 50€ You would get 0.25 fragments of this company.

Calculation example 2 - Exact share

If you want to buy exactly 0.5 fragments of a company that costs €200, Would you have to invest exactly 100€.

Brokers such as Comdirect, Trade Republic and Scalable Capital offer to buy fragments in Germany.

• With Comdirect investors can invest in fragments via savings plans. This is particularly beneficial for investors who want to invest smaller amounts on a regular basis.
• Trade Republic offers a mobile platform that allows investors to easily and quickly invest in fragments, often without trading fees.
• Scalable Capital also offers a wide range of investment products, including the ability to invest in fragments.

Tax aspects of fragments in Germany

In Germany, investment income, which includes dividends and sales gains from shares, taxed with the flat rate withholding tax of currently 25% as well as a solidarity surcharge and, if applicable, church tax.

This also applies to fragments. It is important to keep all purchase and sale receipts to be able to determine the exact amount of taxable income.

Risk management for fragments

Partial shares can also offer risk management benefits. Since they enable investors to invest in different companies even with small amounts, they can represent an effective diversification strategy. However, it is important to note that fractional stocks are subject to the same market volatilities as full stocks. The advantage lies in the ability to diversify risk more effectively and thus minimize the overall risk of the portfolio.

Fragments at NAO

The NAO platform offers a special opportunity for investors. In contrast to traditional stock or ETF investment options NAO enables its clients to invest in a UBS private equity secondary fund.

Private equity is an asset class that is generally only accessible to institutional investors or wealthy individuals. However, by using fractional shares, or in this case, fragments to a fund, NAO opens the door for a wider range of investors.

A major advantage of this investment opportunity is the significant reduction in the initial amount. While the minimum investments for private equity funds are often in the six-figure range, The structure of NAO allows an initial sum of just 1,000€. This makes it far more accessible for investors to incorporate the benefits of private equity into their portfolio without having to tie up their entire capital.

The concept of fragments therefore allows NAO to bring exclusive investment opportunities to the general public. For investors who are looking for a diversified portfolio structure and are ready to explore new asset classes, NAO offers a unique and cost-effective solution.

You can find more information about private equity as an asset class here.

conclusion

Fragments offer an exciting opportunity to invest in the stock market, particularly for those who do not have the necessary capital for full shares. They enable greater diversification and offer access to high-priced stocks. However, there are also disadvantages that investors should be aware of.

faqs

Can stocks and funds be shared?

Yes Both stocks and funds can be traded in the form of fragments of fund shares.

Which is better, broken pieces or full stocks?

There is no “better” or “worse.” The advantages and disadvantages of fractional and full shares depend on individual investment objectives and available capital.

Are fractional shares worthwhile in the portfolio?

For many investors, yes, especially if they are looking for diversification or want to invest in high-priced stocks. However, it is important to note the specific pros and cons.

How are fragments taxed?

In Germany, capital gains from share sales or dividends are taxed at 25% flat rate withholding tax, the solidarity surcharge and, if applicable, church tax. This also applies to income from fragments.