Eli5 – Robinhood sent a thing out about fractional shares being “not held”. What does this mean?
In: 15
what did the communication say?
typically, fractional shares are a representation of an equity, but are not “Real” until they accumulate to a full share. you may not be able to sell them, though some brokerages will allow you to liquidate them, as they hold whole shares that hedge the positions and its more of a courtesy.
Fractional shares are an oddity as you cannot actually sell a fractional share on the market. To sell a fractional share, a brokerage needs to combine the fractional shares into a whole share.
Due to this, there are issues with trading fractional shares and they are generally much less liquid (aka, harder to buy or sell) than related whole shares. By marking trades of fractional shares as “not held”, the brokerage is allowed much more freedom in executing trades, however the fractional share may sell for less than market price. The reverse is also true: if trying to buy a fractional share, the brokerage has more freedom to buy, but may end up buying for more than market price. For major stocks, fractional shares are likely still liquid enough for it to not have much impact, while less traded items may see significant differences in price or delays in execution.
It is also worth noting that fractional shares also create issues with voting. Fractional shares may either not be voting, or a brokerage may combine like-minded votes from multiple fractional holders to allow them to vote.
Latest Answers