What are Fractional Shares?
Fractional shares, also known as fractional trading, allow investors to purchase a part of a share of a company instead of having to buy the entire share. This option can be especially useful for retail investors who may not have enough funds to purchase a full share of a particular stock. However, fractional trading is currently not possible in India due to regulatory differences between the country and others, such as the United States, where fractional trading has become popular in recent years.
Differences in Broker Roles Between India and the US
In India, brokers are only permitted to act as agents, meaning they are responsible for placing orders on behalf of their clients. These orders are then sent to exchanges, such as the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE), where they are matched and executed. In contrast, in the US, brokers can also act as dealers, meaning they can be the counterparty to trades, buying and selling securities for their own accounts.
Differences in Share Management Between India and the US
In addition to the differences in the roles of brokers in India and the US, there are also differences in the way that shares are held and managed. In India, investors open both a trading account, used to place orders, and a Demat account, where all securities are held. Brokers in India must become participants with depositories, such as the Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL), in order to offer Demat services. All shares in India are held by these depositories, and investors have beneficial ownership of the shares they purchase.
In the US, there is no concept of Demat accounts. Instead, US investors open a trading account. Dematerialized shares purchased in the US can either be held in the investor’s name or in the name of the broker-dealer (also known as “street name”). The street name concept allows broker-dealers to own stocks in their own name and pass a “book entry” to their clients, indicating that the client is the beneficiary of the shares according to the broker-dealer’s records.
Overall Impacts of Regulatory Differences on Fractional Trading in India
Overall, while fractional trading can be a useful tool for retail investors looking to invest in expensive stocks, it is not available in India due to regulatory differences between the country and others. These differences can affect the way that investors trade stocks and the level of protection they have when they invest. It is important for investors to understand these differences and the regulations governing the stock market in India in order to make informed investment decisions.