How does ownership in fractional shares work?

Question

I've been trying to find out some more information about fractional shares, and how they work. I understand conceptually, you own x% of a share rather than x "full" shares, but I'm curious about how such a system is implemented.

As I understand it, in a "traditional" purchase of shares, the role of a broker is to act as an executor on your behalf, and does not hold any assets themselves. In the case of a fractional share, is this then not the case? For example, the broker holds the complete shares, and then just ensures that they keep an internal record of each partial owner in their system? So there would be no external record of partial ownership?

Thanks!

Bob Baerker · Accepted Answer

Major stock exchanges and major brokerage firms require that you buy whole shares.  Some brokers are willing to buy whole shares of stock and divide them up for investors seeking fractional share positions.

Window Trading  is where  orders for the same stock are rounded up and purchases/sales are executed at specific times during the trading day.  The broker holds the total shares in street name but the the fractional shares are distributed across accounts in house as book entry.

Window Trading is also common with DRIP web sites that purchase whole shares  X times a month for investors opening a DRIP.

Another method is where the broker executes the the full share portion of the order on an agency basis and for the fractional share portion, they sell to you from their own account at NBBO.

There are some drawbacks to fractional shares but overall, they're minor (non transferable, not receiving a fraction of a dividend, higher commission in relation to the principal...)

How does ownership in fractional shares work?

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