What are fractional shares in India, and why are they generating buzz? With 34.5 million demat accounts opened in FY22, per Stockal, and mutual fund AUM at ₹59.31 lakh crore in September 2024, per AMFI, retail investing is booming. Fractional shares could democratize access to high-priced stocks like MRF (₹1.25 lakh), but they’re not yet tradable in India. Let’s break it down.
Defining Fractional Shares:
Fractional shares refer to owning a portion of a company’s stock rather than a full share. This concept allows investors to invest smaller amounts in expensive stocks, making the stock market more accessible. For instance, if a stock is priced at ₹10,000, an investor can choose to invest ₹1,000 and own 0.1 of that share. This approach democratizes investing, enabling individuals with limited capital to participate in the equity market.
Benefits of Investing:
- Affordability and Accessibility: These shares lower the barrier to entry, allowing investors to participate in the stock market with limited capital. This is particularly advantageous for young investors or those new to investing.
- Diversification: Investing in these shares enables individuals to diversify their portfolios across various sectors and companies, even with a modest investment. This diversification can help mitigate risks associated with investing in a single stock.
- Dollar-Cost Averaging: By investing fixed amounts regularly, investors can purchase more shares when prices are low and fewer when prices are high, potentially lowering the average cost per share over time.
- Exposure to Global Markets: Platforms like INDmoney allow Indian investors to buy fractional shares of U.S. companies, providing exposure to global markets and industries
How Do These Shares Work?
These shares are typically created through corporate actions such as stock splits, mergers, or Dividend Reinvestment Plans (DRIPs). For example, during a stock split, if a company announces a 2-for-1 split, shareholders receive an additional share for every share they own, potentially resulting in fractional shares if the number of shares doesn’t divide evenly. Similarly, DRIPs allow investors to reinvest dividends to purchase more shares, which can sometimes result in fractional holdings.
Limitations and Regulatory Hurdles:
Fractional shares in India face challenges. The Companies Act, 2013, requires a minimum of one full share, and brokers can’t hold shares in their name, unlike US broker-dealers. SEBI’s 2022 sandbox application to enable fractional trading was rejected, and amendments to the Companies Act are also pending. These shares also lack voting rights, have lower liquidity, and may incur complex tax calculations. In 2024, SEBI’s delay in approving fractional ownership frustrated investors. Dividends are proportional but reinvestment can be tricky.
Conclusion:
In conclusion, fractional shares could unlock new opportunities, but what you need is patience. Though still in the early stages domestically, this concept is reshaping how Indian investors think about accessibility and wealth-building. As technology regulations evolve, we may soon see domestic fractional investing become mainstream. Ready to invest smarter? Explore more financial insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Fractional Shares here – https://www.investopedia.com/fractional.asp