A fractional share is less than one full share of equity ownership. The concept is used in a dividend reinvestment plan, where the dividends paid to an investor are not sufficient to buy an additional share. Instead, the shareholder is credited with a fractional share until such time as additional dividend reinvestments are cumulatively sufficient to purchase an additional share. The concept is also used in reverse stock splits, where the number of shares is reduced in order to eliminate small stock holdings. For example, a company enacts a 100:1 reverse stock split; an investor had owned 50 shares, and now owns a 0.50 fractional share. The company then makes a cash payment to the investor to buy back his fractional share.
Shareholders can also receive fractional shares as part of a conversion, especially when they are the selling shareholders and are having their shares converted into the shares of the acquirer at an odd exchange rate. For example, a shareholder owns 100 shares of Small Company stock. Small Company is acquired by Big Company in a stock-for-stock transaction, where the Small Company shareholders convert their shares into the shares of Big Company at an exchange rate of 0.817. This means that the investor now holds 81.7 shares of Big Company, which is actually comprised of 81 shares and 0.7 of a fractional share.
It is typically quite difficult to sell a fractional share, since it cannot be traded on a stock exchange.