A fractional share is a partial share of stock. Fractional shares generally cannot be purchased on the stock market and are the result of activities like stock dividends and stock splits. Depending on a company's policies in regards to fractional shares, there are different methods for handling them when they arise. Typically companies do not issue certificates for these types of shares.
A classic situation where a fractional share can come up is in a stock split, where a company's stock is divided into smaller segments. Someone can end up with a half, third, or some other fraction at the end of the split as a result of how the split is performed. Some companies opt to simply round up. If someone is to be left with 142 2/3 shares of stock after a stock split, for example, the company would round up to 143 shares. This can be tidier for accounting purposes, in addition to reducing confusion.
Another option is to cash out the fractional share. In this case, when people have fractional shares after a dividend, split, or other activity, the company sends them cash in the value of the fractional share and records the other shares normally. In the example above, if shares were valued at $9 US Dollars (USD) per share, the shareholder would receive a payment of $6 USD in exchange for the 2/3 share, and would be recorded as owning 142 shares of stock.
In a stock dividend plan, where people receive dividends in the form of more stock, people may be allowed to keep fractional shares, and the shares will be added together over time. If someone needs to cash out, the shares will be dealt with by rounding or receiving cash from the company. As long as a person is not planning to sell or trade the stock, however, the company may have no problems with maintaining records relating to fractional shares.
Accounting for fractional shares is important, but can also be a nuisance, as it is difficult to keep track of remainders and oddments. Companies set policies for the handling of such shares in advance so they will be prepared to take the appropriate steps when they come up. People who are not sure about how a fractional share will be dealt with can ask a company for more information. Whenever events like dividends and splits occur, people should make sure their accounts are properly recorded; if a two percent dividend is announced, for example, and someone doesn't receive a two percent stock increase, this should be addressed as quickly as possible.
