Fractional Trading means trading in a proportion.
Did you know that the share price of Berkshire Hathaway (Warren Buffett) company is $4.96 Lakh, but you can still purchase that share in a fraction (small proportion).
Yes! You can invest $1 and purchase any dam share in the US stock market using fraction trading. Apart from the USA majority of developed countries provided the facility of fraction share trading.
Fraction Trading gives the following benefits –
- You can invest money in the stock market with less capital and purchase a fraction of shares.
- You can diversify your portfolio with less money and invest in high-value blue-chip stocks.
- This facility offers flexibility to investors.
- Novice investors can also participate in the stock market with less capital.
Imagine a case where you want to buy MRF shares. Now cost of MRF share is INR.70000 (As of April 2022).
You have two choices you need to wait till the share price come down or you need to purchase full stock.
But what if I tell you that Fraction Trading in India is soon going to become reality.
Sounds fascinating right?
It’s like dream come true for the new stock market investors!
Continue reading to know more about Fractional Trading in India.
Fractional Trading in India – Dream or Reality
The dream of fractional trading will soon become reality in India. Investors will be able to purchase shares in fraction proportion by just spending INR 100.
The company law committee has proposed to start fractional share trading in BSE/NSE. This report is submitted to the finance minister and is in the advanced stage of discussion.
As of now company act does not permit issuing fractional shares to investors. Once this proposal is approved retail investors can invest in high-value shares.
The approval is expected by May 2022.
This facility will be offered only for the fresh issue of shares by the companies. The fractional share will not be issued directly to the investor trading account. These shares would be kept in the appointed trustee account. The trustee would be appointed by the board of the company.
3 Methods of Issuing Fractional Shares
The fractional shares are newly issued shares by the company. These shares will be created by the following methods.
#1 Stock Split
Many times board of the company approves a stock split from time to time. The stock split may often produce shares in odd numbers. This requires the issue of fresh shares for splitting stocks. At that time-fractional share will be created.
#2 Mergers & Acquisitions
A most common way of creating fraction shares is through mergers and acquisitions. In mergers and acquisitions companies merge and create new shares with a particular ratio. At that moment fractional shares can be issued.
#3 Dividend Reinvestment Plans
Companies may offer a dividend reinvestment plan and allow the investor to remain with them by reinvesting divided. The dividend amount is converted into shares and at that time fresh fractional shares can be issued.
How fractional share trading is beneficial?
Issuing fractional shares is extremely helpful It gives the following benefits.
#1 More Investors
This step will bring more investors into the share market. Many retail investors will participate as the amount of investment will be very less.
#2 Low Capital required for Share market
Novice investors will need small capital starting from INR 100 to invest in the stock market. This means one can invest in the stock market with limited capital.
#3 Opportunity to invest in Blue Chip High-value stock
As of now if you want to invest in any company you have to purchase at least one share of that company. Most of the blue-chip stocks are high-value stocks and beyond the reach of the common man. Suppose as a novice investor if you want to invest INR 1000 you cannot purchase the stock of HDFC or Reliance as the share value is higher.
Once this facility is launched you will be able to invest in these shares.
As you can purchase shares in a fraction you can get the advantage of diversification of your stock portfolio. You can invest in different companies with low capital.
#5 Increase in Trading Volume
Once this facility is available it will increase the trading volume as more and more people will participate in the trading of fractional shares.
#6 Investment without Demat Account
As fractional shares will remain in the account of the trustee appointed by the board it might not require a Demat Account. This will reduce the additional burden of managing demat accounts for the new investors.
Drawbacks and Limitation of Fractional Share Trading
#1 Difficulty in Trading
It will be difficult and time-consuming for the trader to trade using fractional shares as it requires changes in the currently designed applications.
#2 Tax Complication
Tax assessment of fractional shares trading may create unwarranted complications. You may end up wasting more time on ITR filing in the fractional trading case.
#3 Inflation in Share Market
The fractional trading may create inflation in the stock market and expensive stocks that are trading at a higher price might further become costlier. In short, it will create artificial inflation in the stock market.
I think fractional share trading in India will not remain a dream and become reality soon.
This facility will be beneficial to novice investors as well as to the Indian economy. It will increase retail investor participation in the Indian stock market.
What are your thoughts about Fractional share trading in the Indian stock market?
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