In today’s Finshots, we dive into the concept of fractional shares.
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What’s common between MRF, Honeywell Automation, Page Industries and Shree Cements?
It’s going to cost you a ton of money if you want to buy one of these shares. They trade at anywhere between ₹25,000 and ₹1,10,000 a pop! And that means buying a single share might be well out of reach for most retail investors in India.
But what if it wasn’t that hard? What if you could still own these shares without emptying your bank account?
Well, this could soon be quite possible. Thanks to the market regular SEBI considering a concept known as fractional shares. Simply put, it means that you can buy just a slice of a share instead of the whole thing. And even if you just have ₹1,000 lying around, you can still buy a bit of MRF.
And this could bring a whole slew of benefits.
For starters, it could entice more people to invest in the markets. As of now only 3% of the Indian population invests in the stock market. That’s way behind China’s 13% and the US’ 55%. But that could change with increased stock market participation owing to fractional shares.
Stocks start looking more affordable and this could aid participation.
There’s an added benefit too. You see, many retail investors simply look at the ‘price’ to determine whether a stock is expensive or not. So they eschew big names and buy penny stocks that are available for less than ₹10 each. You know, the kind of stocks that constantly get talked about on YouTube and Telegram pump-and-dump schemes. But if high-quality names are easily available, these same retail investors might rethink their strategies and make better choices.
Diversification becomes a whole lot easier too. Imagine someone had ₹5 lakhs to invest. And they had their eye on the MRF stock. Buying just one share would mean that 20% of the portfolio is skewed towards one name. No one wants that. They don’t want all their eggs in one basket. Because if something goes wrong with the company, it could have an outsized impact on the portfolio value. So getting fractional shares could mean easy access to more companies and more diversification.
Even companies could heave a sigh of relief. Because sometimes, they’re forced to conduct something called a stock split. If one share is priced at ₹10,000, the company might choose to split it into 10 shares. And then each share will only be worth ₹1,000. They often do this to make their shares more appealing to retail investors. And naturally, this process is a bit of a hassle and costs money too. But once fractional shares come into the mix, they can avoid playing these games.
The only disadvantage is that when you own a fractional share, you may not be entitled to voting rights in the company. You can’t really voice your opinions on remuneration for the CEO and stuff. And if access to fractional shares means that you trade more often, you could also rack up brokerage-related fees quite quickly.
But wait…we haven’t told you the main bit — how on earth does this actually work? How can companies issue a quarter or half a share?
Well, in most parts of the world, they technically don’t!
Let’s look at how it works in the US — a market where fractional investing has really taken off — to get a better sense of things. See, companies don’t really issue tiny bits of shares. Rather, it’s the brokers that facilitate these transactions. Now the thing is that brokers in the US can buy and hold shares in their own name. They’re also dealers. So when investors ask for a fractional share, the broker-dealer doesn’t actually transfer ownership of the share. Instead, they simply jot it down in their books and say something to the effect of “0.25 shares of Amazon to X and 0.10 shares of Amazon to Y.” And if there’s anything leftover of the share after it’s distributed, the broker continues to hold it in their own name.
Basically, companies issue full shares. Broker-dealers buy them. And then divvy it up among investors who want fractional ownership. Easy-peasy.
But the thing is, Indian rules don’t allow brokers to also operate as dealers. They can just work as intermediaries to help facilitate trades. So that kind of a model may not really be possible here unless SEBI decides to be quite radical and flip everything upside down.
Will they? We don’t know yet.
The other way to do it is if companies themselves will be given permission to issue fractional shares. And for that, the government will have to first tweak the Companies Act which currently states that companies cannot offer investors anything less than one share. Maybe that will allow investors to get a slice of high-priced shares more easily.
Anyway, all this is still in the very early stages and we don’t quite know what SEBI and the government will do about it. But we just thought we’d introduce you to the concept today. And maybe we’ll write more when the plans actually fructify.
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