Should You Invest In Fractional Shares In Your ISA?

So how do fractional stocks work, and why is this announcement good news for investors?

Updated: December 1, 2023
Jason Mountford

Written By

Jason Mountford

 

Whether or not you paid much attention to the announcements in the UK government's Autumn Statement earlier this month, but there’s one interesting change that might have slipped past you. For those who invest via an ISA, it opens up a new range of opportunities that might previously have been out of reach.

The change I’m referring to is the fact that investors will soon be able to invest in fractional shares through an ISA.

Now this might not seem like a big deal, but it’s especially relevant for beginner investors with lower balances who want to invest in US stocks. The prices of those can get incredibly high, for example just 1 share of Warren Buffett’s Berkshire Hathaway A stock currently costs over $546,000!

So how do fractional stocks work, and why is this announcement good news for investors?

What are fractional shares?

First things first, let’s cover exactly what fractional shares are. In very simple terms, fractional shares allow an investor to buy a ‘fraction’ of a share in a company. This is unique, because usually investors need to purchase at least one whole share in order to invest in a company.

This might not be a big deal for shares that cost a few pounds or dollars each, but it can be a problem for investors who want to invest in companies that have large share prices. This is a bigger issue for companies in the US, which tend to have fewer stock splits, resulting in higher share prices for the most well known companies.

The previously mentioned Berkshire Hathaway is an extreme example, but there are plenty of other companies with expensive shares, such as Broadcom ($946), Coca-Cola ($719), Adobe ($623) and Costco ($594).

These high prices make it hard for investors to achieve proper diversification whilst still including them in a portfolio. For example, if an investor with an ISA worth £3,000 wanted to invest in Broadcom, just one share would make up almost 25% of the portfolio. Instead, with fractional shares they could purchase 1/10 of a share, allowing them to gain exposure to the company while only needing to invest a much lower amount.

It means that for investors with lower balances, they can invest in more stocks, achieve better diversification and therefore lower the risk in their portfolios while still aiming for attractive ISA returns.

How the ISA rules have changed

Up until now, it wasn’t possible to hold fractional shares within an ISA. That meant that investors were more limited in the companies they could invest directly into if they wanted to keep sufficient diversification. 

From April next year, this restriction will be lifted, meaning that investors can now invest in fractional shares within their ISA’s. It really is that simple, but it opens up a much larger pool of assets for investors, especially those with lower balances.

Should you invest in fractional shares in your ISA?

So while you will soon be able to invest in fractional shares in your ISA, does that mean you should. While this is overall good news for investors in my opinion, there are some downsides to consider.

Shareholder rights

As a shareholder, you have rights such as the ability to vote at the Annual General Meeting on things like board compensation. Depending on the ISA provider, you might not get those same rights through fractional shareholdings.

Reduced Liquidity

Not all shares are available as fractional shares, and the volumes traded on this basis will be far lower than normal. That will mean it could take longer to buy and sell, and you might have wider spreads on your transactions.

Transfers

It may not be possible to transfer fractional shares to another provider directly. This isn’t a huge problem with ISAs given their tax-free status, but it will mean the need to sell your holdings to cash and then rebuying if you want to switch ISA provider.

The bottom line for investors

The addition of fractional shares into ISAs in the UK is a good result for investors, especially those with lower balances. It will open up the ability to improve diversification and therefore lower risk, without a major increase in ongoing costs.

If you’re thinking of investing in fractional shares in your ISA, it’s important to be aware of some of the downsides, such as the lower levels of liquidity in the fractional market and potential loss of shareholder rights.

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