Fractional shares offer flexibility and accessibility to investors by allowing them to purchase a portion of a share, rather than needing to buy a full share. This is especially helpful for investors who wish to invest in high-priced stocks but have limited funds. However, understanding how fractional shares behave after certain corporate actions, such as stock splits, is essential for effective investment management.
One such corporate action is a forward stock split, and it has a specific impact on fractional shares. Let’s take a closer look at how fractional shares are handled after a forward stock split, particularly when using the Tiger Trade, a trading fractional stock App from Tiger Brokers.
What is a Forward Stock Split?
A forward stock split occurs when a company increases its number of outstanding shares by issuing additional shares to current shareholders. For example, in a 2-for-1 split, shareholders would receive one additional share for every share they already own. Similarly, in a 3-for-1 split, shareholders would receive two additional shares for every share they own.
The main reason for a stock split is to reduce the stock price, making it more accessible for smaller investors. While stock splits do not change the overall value of your holdings (they simply adjust the share count and price), they can affect fractional shares if the split results in fractional increases.
Handling Fractional Shares After a Forward Split
Let’s say you hold 1.6 shares of XYZ Limited in your Tiger Trade account. Now, if XYZ Limited announces a 1-for-3 stock split, you will receive an additional 3.2 shares (1.6 x 2) to your account, bringing your total shareholding to 4.8 shares.
However, this is where fractional shares come into play. Since the stock split is based on whole numbers, it is possible that the increase in shares will result in a fractional share. In this case, you’ll be receiving 0.2 fractional shares as part of the stock split increase.
What Happens to the Fractional Share After a Forward Split?
Tiger Trade, like many other brokers, has specific rules in place to handle fractional shares resulting from stock splits. After a forward split, if there is any fractional share portion that cannot be distributed to you as a full share, that portion is cashed out and the amount is credited to your Tiger Trade account in cash.
Example:
Here’s an example based on the previous scenario:
– Before the split: You own 1.6 shares of XYZ Limited.
– After a 1-for-3 forward stock split: You should receive 3.2 shares (1.6 x 2).
– The fractional share portion: 0.2 shares.
– The fractional share part will be cashed out, and you’ll receive the equivalent cash value for that 0.2 share.
After the transaction, your holdings will be:
– 4.6 shares of XYZ Limited (1.6 original shares + 3.2 new shares – 0.2 fractional share cash-out).
This cash-out process ensures that fractional shares are handled efficiently and you won’t have to worry about maintaining a fractional position after a stock split.
Conclusion
Forward stock splits are a common corporate action that can impact fractional shares. After a forward split, the fractional share part (if any) will be cashed out, and the remainder of the shares will be adjusted accordingly in your account. The Tiger Trade app from Tiger Brokers provides a smooth process for handling these scenarios, ensuring that your holdings remain clear and that any fractional shares are properly accounted for in cash.
With fractional shares and forward splits, you can continue to invest in a diversified portfolio with ease, knowing that any fractional shares resulting from a stock split will be cashed out automatically.
