All about fractional shares in Canada

What are fractional shares?

Fractional shares in Canada allow investors to purchase a portion of a share, rather than the entire share, making it easier to invest in high-priced stocks and build a diversified portfolio. Instead of buying one whole share, investors can purchase a fraction of a share, such as 0.5 or 0.25 (a half or a quarter) shares. These types of shares allow you to invest in stocks you would otherwise not be able to afford if you had to buy an entire share. Note that a fractional share works just like any other type of share so you can still earn dividends.

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How are fractional shares made available?

Fractional shares in Canada are available in three main ways:

1. Via select brokers who intentionally split shares. Some brokerages such as Wealthsimple Trade and Interactive Brokers now let Canadian clients purchase fractional shares, directly. To make normally very high priced shares (like Microsoft, which sells for over $400 for just one share) available to more of its clients, some investment companies will split whole shares into a series of smaller slices or fractions.
2. Stock splits: Some companies will purposely decide to split its own shares to increase its stock count to increase liquidity and to make more shares available to the public. For instance, if a company announces a 3:1 stock split, each share you own would be converted into three separate shares. So, if you only held one share at the time of the split, your single share would be transformed into three shares after the split.
3. Mergers and dividend reinvestment plans: Fractional shares may also be created due to a corporate merger or acquisition, or when investors participate in dividend reinvestment plans.

How do fractional shares pay dividends?

Some companies offer shares that pay dividends. Dividends are a way to reward stockholders for their purchase by paying out a set amount on a regular time schedule, like quarterly. If you own a share from a company that pays dividends, as a fractional shareholder you will receive a proportional amount based on the fraction of the share they own. For example, if a company pays a $1 dividend per share and you own 0.5 shares (i.e. half of a share), you would receive a $0.50 dividend per fractional share.

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Why invest in fractional shares?

Think of fractional shares as a way to even the playing field. If you’re not wealthy and don’t have a lot of additional income to put into stocks, there would be a large number of company stocks that would likely be out of your reach due to their high share prices. (For example, at one point Amazon was trading at over $2,400 per single share before its 2022 stock split, which would have meant that only very wealthy Canadians could have invested in Amazon.)

Fractional shares make it easier for investors to buy into high-priced stocks, such as Amazon or Google, without needing to invest a large sum of money upfront. This opens up more investment opportunities for those with limited funds by making some of the most valuable stocks in the world more accessible to more people.

Portfolio diversification is another good reason to invest in fractional shares. By investing in fractional shares, investors can spread their money across a wider range of stocks and sectors, reducing overall portfolio risk. Instead of putting all your money into one or two stocks, you can invest in a variety of companies, even if you have a smaller budget.

How to buy fractional shares in Canada?

Unlike in other countries like the US, there are not yet a lot of options when it comes to buying fractional shares in Canada. Two of the most popular and trusted ways to buy fractional shares are via reputable investment companies such as Wealthsimple Trade and Interactive Brokers.

Wealthsimple Trade: The first Canadian brokerage to offer fractional shares in 2021, Wealthsimple Trade allows investors to buy and sell fractional shares of over 500 Canadian and US stocks and ETFs, including these key stocks: Shopify, Royal Bank of Canada, Amazon, Google, Apple, Microsoft, Tesla and Netflix. To start trading, you just need to open a Wealthsimple Trade account and select "Fractional Trading." You then choose your stock, and enter the dollar amount you wish to invest (for example $1 or $200) and then Wealthsimple will tell you the estimated quantity of shares you’ll get for your proposed dollar amount.

Interactive Brokers: This global investment broker recently launched fractional shares trading in 2023 for Canadian stocks and ETFs listed on the Toronto Stock Exchange and CBOE Canada, as well as eligible US and European stocks and ETFs. To buy fractional shares with Interactive Brokers, you need to enable fractional shares and then make orders in a specific cash amount. Fractional shares will automatically be bought or sold if the cash amount doesn't buy a whole number of shares.

How much do fractional shares cost?

The cost of a fractional share varies significantly, and depends entirely on how much of a share you want to buy and which share you’re looking to purchase. For example, if a stock is trading at $100 per share and you want to buy 0.1 shares, the cost would be $10.

Benefits of fractional shares

There are numerous benefits to investing in fractional shares Canada:

• It’s a way to make high-priced stocks more accessible to everyday investors who aren’t wealthy
• Easier to build a diversified portfolio
• Platforms such as Wealthsimple Trade allow you to invest exactly the amount you want to so you don’t overextend yourself financially
• Potential for dividend income, even with small investments

Alternatives to fractional shares

While fractional shares in Canada offer many benefits, there are some alternative kinds of investments to consider, such as exchange-traded funds (ETFs) or mutual funds, both of which allow you to own a basket of stocks, providing diversification and exposure to various companies and sectors.

• ETFs: Exchange traded funds are traded on an exchange like regular stocks but allow you to invest in a bundle of stocks that track a particular index (like the S&P/TSX Composite Index), a sector or an asset class, providing instant diversification. Because they are not actively managed (unlike mutual funds) they tend to have very low fees, making them affordable for most investors.

Mutual funds: Mutual funds are professionally managed funds where people pool their money to purchase a variety of securities like stocks, bonds and other assets. Since they are actively managed, they have higher fees than ETFs.