How do fractional shares work?


#1

I’m interested to know how Freetrade will facilitate dealing in fractional shares.

My uneducated guess would be orders(basic) are collected and executed to the nearest whole number. Or do the markets themselves allow trade in fractions?

If it is the first route, does this mean fractional dealing will be possible only on basic trades and not instant?


#2

This is something that I would like to know about too. It’s the biggest reason I’m interested in the Freetrade app. Lots of great stocks are too expensive to buy at their current prices.


#3

As freetrade are the custodian of all shares purchased via the app. It means that freetrade have the ability to buy a single share in a company and then turn this share into a fraction for us to purchase. It means that freetrade will always have to have a stockpile of unsold shares that can be used for fractional trading.

Imagine if two investors both want to own 0.25 of a share of Tesla for arguement sake.

Freetrade will have to purchase an entire share, and 0.25 will be allocated to each investor and Freetrade will retain the 0.5 of a share.

If someone else wants to purchase 0.51 of a share of Tesla, freetrade will have to purchase an additional Tesla share as the amount held by investors would be 1.01 shares. And Freetrade would retain the 0.99 until someone else wants to either buy/sell.

It means that have some amount of market exposure as they will own small quantities of each fractional share offered on their universe.
But it’s a small price to pay in order to offer this service.

Hopefully this helps you understand it in a very basic format.

Kind regards


#4

Thanks.

This wouldn’t be practical for instant shares? Or would Freetrade take on the market exposure in these situations also to be able to provide that service.

With basic orders. 1000 different orders for X stock amounting to 5678.5 shares means Freetrade can just buy 5679 at 4pm and hold 0.5 until they can dispose of it.

With instant trades this wouldn’t work as neatly at least not until sufficient volume builds?


#5

Even with an instant trade the maximum exposure freetrade would have is 1 share.

Let’s say freetrade own 0.99 as above.

Someone places an instant order of 5.5 shares.

Freetrade purchase 5 shares and then convert the 0.99 into two 0.5 and 0.49.

The customer becomes the proud owner of 5.5 shares and Freetrade retain the 0.49 exposure.

But let’s say now another instant trade gets made shortly after for 0.5 shares.

Freetrade will have to buy a whole share via instant trade. So the total is 1.49.

The customer gets 0.5 And Freetrade are back at 0.99 exposure.


Obviously end of day trades are somewhat easier - 10 customers all wanting fractionals of the same stock; will all be bough at the same time in bulk. And the remainder of the fraction is Freetrades exposure.