FY22 saw a major surge in trading, with 34.5 million demat accounts were created FY22, which is more than double the number of accounts four years ago. This new breed of investors is made up of majorly young people have just started their investment journeys. At a young age to have enough money to buy FAANG shares is not possible, thats where fractional shares come in.

These investors are also looking to diversify their portfolios and are eyeing getting a piece of the US stock market. Among the US stocks, the FAANG stocks are the most popular ones to invest in, however, considering the rupee-dollar conversion, owning a single stock can be expensive for a normal retail investor.

One share of Apple costs around ₹13,000 (assuming $1 = ₹80), which can be more than what most people can spare. So, is it possible to buy a small piece of one share? Can we buy fractional shares in India? The answer is yes. Let’s understand how.

 Why should one Invest in Fractional shares?

Fractional shares make investing more accessible to investors by enabling them to buy stocks from companies with share prices they may not otherwise be able to afford. With fractional investing, investors can now own shares of various US companies that are known to perform well and also reap the benefits of receiving dividends, like Apple, Amazon, Google, Microsoft.

Because of this new breed of investors, the attraction to invest in US shares from India has also picked up though affordability is still a challenge. To keep the flame of investing burning among these investors, fractional investing has been introduced so that these investors don’t miss out on the benefits of investing in US stocks. 

So, let’s understand how to buy fractional shares in India, how they work, and why should one invest in fractional shares.

What are fractional shares, and what is the need for fractional share investing in India?

Before we deep dive into understanding how to buy fractional shares in india, let us first comprehend what they are and why they are important.

To understand this concept, let’s use an illustration. Before we get into the finer details, imagine one Apple share as the world’s biggest apple pie. Thanks to the wonders of globalisation, you can now purchase the world’s biggest apple pie from India. 

So what’s stopping you? The price, of course. The pie costs a whopping $200, which according to the exchange rate, may cost approximately ₹16,000. 

However, what if we were to tell you that you can buy a percentage or a fraction of the whole pie? You can choose how much of the pie you would like to own according to your budget constraint. If you only wish to spend ₹160, you may own just 1% of the pie and let your belly enjoy its sweet returns.

Similar to the pie, you can purchase shares of a company like Apple fractionally. A fractional share of a company’s stock enables an investor to own a little portion, or fraction, of a complete share. You get the benefits proportionally if the stock rises and the risks as well if the stock falls. 

Fractional share investing is the need of the hour for Indian investors. Indian investors can purchase a share as low as $1 share in IT behemoths like Google, Apple and Facebook. In absolute terms, shares of the biggest IT businesses are expensive. 

For example, let’s assume you have received a  hefty windfall gain of ₹ 50,000. It is still not possible for you to invest in one share of all FAANG companies:

However, with the use of fractional share investing, you can invest in a percentage of the FAANG companies and utilise all of the received amounts to become an investor in all of the above companies. 

Can we buy fractional shares in India? 

In India, an investor has to buy at least a whole share if they want to invest in the stock market. The concept of fractional investing in Indian stock is not allowed yet though this feature is very popular in the US. The government has constituted a Company Law Committee (CLC) that is looking into this aspect more closely. 

When it comes to investing in US stocks, Indian investors can now use online platforms like Stockal to buy fractional shares on US markets. As of now, about 50 stocks may be purchased, out of which Amazon, Apple, Microsoft, Alphabet (Google), Netflix, Meta (Facebook), Walmart, and Tesla are among the most popular stocks. 

How do fractional shares work?

Before we deep dive into understanding how fractional shares work, let us first understand the difference between Indian and US stock brokers. 

• Brokers are only permitted to represent customers placing transactions in India. The exchanges are where all orders must be submitted so they may be matched and executed. A broker can function as both a dealer and a broker in the US. They are frequently referred to as broker-dealers.
• A dealer behaves as a principal as opposed to a broker, who operates as an agency. Anyone involved in the business of buying and selling securities for their own account, through a broker, or in another way is referred to as a “dealer.”
• Broker-dealers in the US have much greater freedom regarding where and how they execute orders. When submitting orders to stock exchanges, users can either serve as the counterparty to transactions as a principal/dealer or an agent/broker or they can give the orders to a market maker for execution.
• In the US, the practice of paying brokers compensation for orders that market makers supply to them is known as “payment for order flow” (PFOF). India, for the record, does not permit this. All orders are filed, matched, and executed at stock exchanges, including the NSE, BSE, and MCX.

Now that we have explained the differences between US stock brokers vs India stock brokers, let us understand the concept of street name and beneficial ownership:

• To invest in India, you need to open both a trading and a demat account. Using a trading account’s interface, you may place orders. You keep all of the stocks and bonds you buy in a demat account. To offer demat services, a trading member (broker) must register as a participant with depositories like CDSL and NSDL.
• Since depositories hold all shares in India, investors have beneficial ownership of the shares they purchase and may access them at any time through a depository login in addition to their broker login.

In the US, things are slightly different:

Demat as a concept simply does not exist there; US investors set up only a trading account. Investors can hold dematerialised shares in their names or the broker’s – dealer’s names (street name). 

By using the “street name” idea, broker-dealers can hold stocks in their own names and establish “book-entries” in which their clients are the beneficiaries, according to their records. Almost all of the big brokers maintain stock using the street name technique.

One of the factors that allowed brokers to provide trading for no fee was the street name technique of keeping equities. Brokers may profit by lending these assets to short-sellers and provide hassle-free margin funding because the securities are held in the open market.

Coming to the crux of fractional investing, when an investor buys a portion of a share, the broker buys the shares, distributes them to investors, and maintains the stock on its own books. The broker may only sell fractional shares from when they were purchased.

Offering fractionals have no risk for broker-dealers or market participants. Broker-dealers never take on more market risk than what is represented by one full share of the stock they are facilitating fractionals in. 

Broker-dealers keep full share inventories and passbook entries depending on client fractional orders. Broker-dealers often adhere to particular internal standards that require all orders to be placed in multiples of a specified fractional percentage, such as 0.1% of a share.

Whole shares and fractional shares are typically identical in the eyes of the investor as well. Fractional shareholders could also be qualified for the same advantages as full shareholders, such as voting rights and a cut of profits and losses, depending on the brokerage. Fractional shareholders are entitled to receive all dividends declared by the Company.

How to buy fractional shares in India?

• Direct investment in fractional shares

You can invest in fractional US shares from India by opening a US brokerage account with a foreign brokerage that has a physical presence there or by using a technology platform like Stockal that provides this service. Additionally, in allowing fractional investments, Stockal is effective and compliant.

• Curated Stacks 

With just one click, you may invest in pre-configured bundles of stocks and ETFs known as stacks. 

Stockal offers curated pre-made portfolios like US Tech Bluechip that are organised around a certain notion or subject in an effort to address the problem of “what to invest.” Leading financial professionals create each stack to accommodate various investment goals, risk tolerances, and tactics.

What are the advantages of fractional investing?

• Invest in companies with high share prices with any amount of money

You don’t have to wait until you have enough money to purchase a full share if you want to invest in a company with a high stock price. Nor do you have to keep saving until you have enough cash to purchase a whole share.

You may get started investing in fractional shares with less money. The possibility to buy fractional US equities is one of the market’s many beneficial features. 

In the above example, if you receive a windfall gain of ₹50,000, you can invest ₹10,000 in each of your top five US firms. Due to the flexibility of fractional shares, investors may distribute their funds across a variety of businesses.

• Invest precise amounts of money in a stock or ETF

You can only invest in amounts that are equal to the share price of a stock or ETF if you don’t use fractional share investing. You may invest just the amount you want to without worrying about purchasing complete shares when you use fractional shares.

• Easier to reach your desired asset allocation

It could be challenging to spread your asset allocation equally among multiple firms if you can only purchase in whole share increments. By using fractional shares, you can allocate your capital across other businesses however you see suitable.

• More participation in investing

With fractional investing, more retail investors who previously could not trade due to affordability can now step in and put their money on companies of their choice. This helps in increasing their wealth depending on the stock performance and also adds to their savings for the long term.

How to invest in fractional shares: The best way forward

Suppose you want to invest in a particular company such as Netflix because you are confident in the returns it will give. In that case, you can invest in Netflix directly by applying a fractional investment of shares if the whole share is out of the allocated budget.

However, let’s say you want to invest in the best S&P companies or the FAANG, then a curated stack would be a better investment option. The smartest way will depend on your investment amount, your strategy and the risk you’re willing to take.

In Conclusion:

Can we buy fractional shares in India? If we lack the funds to purchase whole shares of internet behemoths like Amazon, Facebook, and Alphabet, we may still hold portions of such companies. Indian investors just can pay as much as $1 to own a piece of large technology companies and Stockal helps us do it.

Exposure to these US stocks serves as a reliable proxy for worldwide exposure. By making a little investment in US shares and simply reaping proportional advantages through Stockal, you may now get this exposure and diversify your portfolio.