A fractional share is a slice of the original share. In this example, since you have sliced the share by a quarter, you now have 4 fractional shares at a cost of $50 each instead of $200 per share. The original share can be sliced further depending on the investment amount.
The Traditional Share Investment Backdrop
Before we delve further into fractional shares, let’s discuss how the share market works, both locally and globally, with a particular focus on the US.
In Malaysia, shares are usually traded in specific amounts, called board lots, of 100 units. This means that a share trading at RM8 will require a minimum initial investment of RM800 (RM8x100) for 1 lot. Aside from the standard board lots of 100 units, one can also purchase less than 100 units in what is called an odd lot. Trading in the odd-lot is usually less desirable due to its high liquidity premium, which indicates a wider bid-ask spread, making it more costly. With such a high entry barrier, it is often difficult for an aspiring investor to construct a diversified portfolio consisting of a wide range of performing asset classes.
However, the same cannot be said for the US market, where you can buy shares in 1 unit increments. Using the same example as above, shares in the US can be purchased at 1 unit, in this case, requiring a minimum initial investment amount of RM8 only (or USD2, assuming USD1=RM4). This also applies to Exchange-Traded Funds (ETFs) which is a basket of companies traded like shares on the exchange. US ETFs are the primary investment tool for KDI Invest.
Fractional Shares in The Picture
With financial innovation, the typical 1 unit of US shares can be further dissected into fractional shares. This feature is typically a bonus feature, offered by certain brokers that investors of KDI Invest are also able to enjoy. Fractional shares allow investors to only trade a portion of the shares in accordance with the availability of their funds. For instance, Microsoft (MSFT) shares which currently trades at $300 can be purchased with only $100 by buying 0.33 shares of Microsoft using fractional share trading. This is very useful as it allows an investor to have a diversified portfolio despite having a limited amount of funds.
In the example below, we show how investors can get exposure to major US tech stocks via fractional shares.