What are fractional shares?
Imagine wanting to invest in Apple – but you don’t have R 2 600 ($ 169) for a single share. This has historically been the issue – people want to invest, but the barrier of entry has been very high. With fractional shares, you can now buy fractions of the share, but still, have the benefits such as getting dividends and selling the share when you want to.
So, you will invest R 100 in Apple shares, and earn dividends on that amount – yay!
The added benefit of this is that you can now have a well-diversified portfolio, without having to buy a full share of everything you need. For example, you can split your share portfolio to the percentage that you want – 30% technology, 30% industrial, 30 % Steinhoff and 10 % play money for penny stocks.
Rebalancing your portfolio is also not dependent on the stock price anymore, as you can buy a fraction of a share now.
Fractional shares and ownership
With fractional shares, you buy the rights to that fraction of the share – fractional share rights (FSR). These rights include the right to dividend payouts – which will be calculated as a percentage of your share.
But what happens to the other part of the share? Does EasyEquities buy that part, give it to other people or…?
So, the answer to the question is that it’s not really a share. It’s a contract for difference (CFD).
Contract for Difference (CFDs)
A contract for differences (CFD) is an agreement between an investor and a CFD broker to exchange the difference in the value of a financial product between the time the contract opens and closes.
When buying fractional shares through EasyEquities, you’re buying CFDs. Under the hood, when you’re buying a fractional share, EasyEquities/The CFD broker buys a CFD contract. CFDs are similar to shares:
- Any profits and losses are passed on to the investor – when selling, this is realised as profits or losses
- Dividends are payable to the investor.
CFDs and Liquidity
Have you noticed that when buying in EasyEquities, you sometimes need to insert multiple transactions to buy the number of shares that you want? What happens here, is that the CFDs/shares aren’t liquid enough. There are often not enough buyers or sellers to execute a deal straight away. To overcome this, the amounts are split into different transactions.
We can see that CFDs can be in short supply at times, such as just before the cut-off date before a dividend payout.
…the spread […is…] the difference between the bid price (purchase price) and the offer price at the time you trade– Investopia
Similar to buying Forex, there tends to be a gap between the buying and selling prices. This gap is called a spread. It’s not unheard of that brokers lower their commission and fees, but enlarge the spread for every unit bought or sold – and make their money back in this way.
Religious issues with CFDs
In some cases, it is against religious principles to buy CFDs. For example, Islamic Sharia law considers this illegitimate gambling (Qimaar). Interest is also paid in some cases of CFDs, which is not allowed. From my research, I am not aware of any interest when owning CFDs with EasyEquities.
The main reasons Islamic Sharia law is against CFDs are:
- You don’t actually own the underlying assets – and
- A CFD is an agreement between the broker and the contractor on an upward or downward price rise on a financial asset
Do I own whole shares in EasyEquities?
When you bought a full share through EasyEquities, you will own the full share. You will have voting rights and all other shareholder rights.
When investing in fractional shares in EasyEquities, you have the opportunity to benefit from the price increases (or decreases) of stocks as well as the dividend payments. This makes EasyEquities fractional shares very attractive to the everyday person.
It’s important that you don’t own the actual fractional share, but a Contract for Difference (CFD).