I'm not totally sure how it's structured, but I imagine RH "owns" the shares and offers you the corresponding fractional amount of value/dividends, etc.
Fractional shares are common when using DRIPs (Dividend ReInvestment Plans) which basically just use all dividend proceeds to purchase more shares instead of paying out in cash. Since then entire amount is used, you always get a fractional share since it would be very rare to get a dividend that is an exact multiple of the market price.
My understanding is that the way this works is that the broker will generally already have an inventory of all of the stocks that are regularly traded through them and simply carve up your fractional allocation from this inventory. When you purchase shares through a broker they can simply sell you the shares directly out of their inventory if they can match the market price. They will even get a small incentive to do this since it produces order flow (volume) without hitting the exchange directly.
This also helps with order clearing (the T+3 rule for ownership transfer). Since the broker is selling out of their inventory, it is virtually guaranteed that your order will clear. When transferring shares between institutions, it's possible that this process will fail and you will be notified that your order wasn't able to be fulfilled. It's rare, but can happen.
While purchasing fractional shares outright is somewhat new, the concept itself has been around for a while and I've had DRIPs at multiple different brokers. I was even able to get fractional shares of high priced preferred stocks going for $1,000+ market per share.
There's a bunch of brokerages offering fractional shares, such as Betterment, Motif, M1, Stash, Stockpile, and others. Schwab has also announced they'll be adding it.
There's also DRIP (Divident ReInvestment Plan) plans, a feature brokerages offer to allow fractional reinvestment of dividends.
Not sure how it's actually implemented as a financial product.
Freetrade in the UK is planning offering this in the next few months I think.
Fractional shares through DRIP is something else really as you can’t purchase them directly.
I’d be interested to know how it works too, but it could be as simple as the brokerage buys 1 share when you ask for 0.5 then keeps the other half on the books, sells the other half to someone else.
>And is this something that exists outside of Robinhood?
I'd imagine similar to all of the other brokerage accounts that allow for fractional shares either via direct purchase or dividend reinvestment purchases. RH's competitor SoFi has had fractional shares for a while now, I would imagine it is set up similar.
But Robinhood will next year according to the announcement: Starting early next year, we’ll support Dividend Reinvestment Plan (DRIP) and Recurring Investments. Automatically reinvest cash dividends back into your stocks and ETFs, and schedule recurring investments
I'm not sure if you can buy fractional shares outright but all of my ETFs in vanguard contain partial shares as they are all set up to reinvest dividends.
- Sofi: https://www.sofi.com/invest/fractional-shares/
- Schwab: https://www.wsj.com/articles/schwab-in-bid-for-younger-clien...
I'm not totally sure how it's structured, but I imagine RH "owns" the shares and offers you the corresponding fractional amount of value/dividends, etc.