Difference between US & India Shareholdings

🇺🇸 Why the US Allows Fractional Shares

1. Mature Brokerage Ecosystem
   • US brokers like Robinhood, Fidelity, Schwab, etc. compete to attract retail investors.
   • Fractional shares let people invest small amounts (say $10 in Apple) instead of buying a full share worth $200+.
2. Regulatory Flexibility (SEC & FINRA)
   • The US Securities and Exchange Commission (SEC) and FINRA allow brokers to “slice” shares.
   • Technically, you don’t directly own the fraction on the exchange – the broker holds whole shares in custody and credits you a proportion.
3. Investor Participation
   • This system helps democratize investing, allowing beginners to buy into Amazon, Google, Tesla without needing thousands of dollars.
   • It has boosted financial inclusion and market participation.

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🇮🇳 Why India Does NOT Allow Fractional Shares

1. Regulatory Restrictions (SEBI)
   • In India, SEBI does not permit trading of fractional shares on stock exchanges.
   • The Companies Act, 2013 also restricts issuance and transfer of fractional shares except in specific cases like mergers.
2. Ownership & Legal Complexity
   • In India, when you buy shares, your demat account records exact ownership.
   • Handling 0.25 or 0.05 of a share complicates corporate actions (dividends, voting rights, bonus shares, rights issues).
   • Example: If a company announces 1:1 bonus shares, what happens to someone holding 0.3 shares?
3. Market Infrastructure Limitations
   • Indian exchanges (NSE, BSE) and depositories (NSDL, CDSL) are built for whole number share settlement.
   • Overhauling the system to handle fractions would require big operational changes.
4. Retail Investor Protection Mindset
   • SEBI takes a conservative stance to protect small investors from complexities/confusion.
   • The focus is on mutual funds and ETFs as the fractional investing route – where fund managers pool money and buy full shares on behalf of retail investors.

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📌 The Workaround in India

• Instead of fractional shares, Indian investors use:
  • Mutual Funds / Index Funds / ETFs → indirect fractional exposure.
  • International platforms like Vested, INDmoney, Groww (US stocks) → they allow fractional US shares under US regulations.

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✅ In short:

• The US allows fractional shares because regulations and broker systems make it feasible and investor-friendly.
• India prohibits it due to legal, regulatory, and infrastructure hurdles — preferring mutual funds for small-ticket participation.

📌 Ownership of Shares in the US

1. Whole Shares
   • When you buy whole shares in the US, you are the beneficial owner.
   • But the shares are typically held in “street name” — meaning your broker (e.g., Fidelity, Robinhood, Schwab) holds them in custody with the Depository Trust Company (DTC).
   • You still have rights: dividends, proxy voting, splits, etc. The broker passes these rights to you.
   🔹 Example: If you buy 10 shares of Apple, your broker holds them in their name on record, but legally you are the beneficial owner.
2. Fractional Shares
   • Here, you are not the direct owner of the stock.
   • Instead, your broker buys whole shares, then “credits” you with a fractional entitlement (say 0.25 of Apple).
   • You don’t get independent shareholder rights (like voting). But you do get proportionate dividends and capital gains.
   🔹 Example: If Apple declares a $1 dividend, and you own 0.25 shares, you get $0.25 credited to your account.

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📌 Difference Between US & India

• In India, your demat account (NSDL/CDSL) shows direct whole share ownership in your name (not in “street name”).
• In the US, most shares (even whole ones) are indirectly held in “street name” via brokers/clearing systems. That’s why when you transfer brokers, shares don’t “move” individually — it’s just an internal bookkeeping entry.

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⚖️ Key Takeaway

• Whole shares (US): You are the beneficial owner with full rights, but shares are held in broker’s name at DTC for settlement efficiency.
• Fractional shares (US): You don’t technically own stock directly, only a broker-created entitlement.
• India: Direct ownership in your name in demat (no fractional system).

📊 Share Ownership Comparison

Aspect	🇺🇸 US – Whole Shares	🇺🇸 US – Fractional Shares	🇮🇳 India – Whole Shares
Who holds the shares?	Held in “street name” by broker/clearinghouse (DTC)	Broker holds whole shares and allocates fractions internally	Held directly in your demat account (NSDL/CDSL) in your own name
You are the…	Beneficial owner (with full shareholder rights)	Entitled participant (economic rights only, not full shareholder rights)	Direct legal owner
Voting rights	✅ Yes (you can vote via proxy forms your broker sends)	❌ No voting rights on fractions (sometimes broker may pool votes, but not guaranteed)	✅ Yes (one vote per share you hold)
Dividends	✅ Paid proportionately	✅ Paid proportionately	✅ Paid proportionately
Corporate actions (splits, rights issues, etc.)	✅ You get proportionate benefits	✅ Reflected proportionately (rounded, sometimes in cash)	✅ You get proportionate benefits
Settlement system	Centralized (DTC + broker bookkeeping)	Broker bookkeeping only	Centralized (NSDL/CDSL demat)
Regulation	SEC + FINRA allow both whole & fractional	Broker-driven system, overseen by regulators	SEBI prohibits fractional shares
Transferability	✅ Whole shares transferable between brokers	❌ Fractional shares usually cannot be transferred, must be liquidated first	✅ Whole shares transferable across demat/brokers

🏦 If a US Broker Goes Bankrupt

1. Whole Shares (in the US – “street name”)

• Your shares are held in custody at the Depository Trust Company (DTC), with the broker as the record holder.
• You are the beneficial owner.
• If your broker collapses:
  • The shares are still yours; they don’t belong to the broker.
  • They can be transferred to another broker.
• Protection: Covered by SIPC (Securities Investor Protection Corporation) up to $500,000 (includes $250,000 cash).

✅ Bottom line: Whole shares are very safe, even if the broker fails.

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2. Fractional Shares

• Fractional shares are not directly held at DTC.
• They exist only as book entries in the broker’s internal system.
• If the broker fails:
  • Your fraction cannot be transferred to another broker.
  • Usually, the broker will have to liquidate your fraction (sell the underlying stock) and pay you the cash value.
• No voting rights, no direct ownership – so you’re dependent on the broker’s records.

⚠️ Risk: You don’t “own” the fraction at the depository level. It’s just an entitlement the broker grants you.

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3. India Context

• In India, all whole shares sit in your demat account (NSDL/CDSL) directly in your name.
• Even if your broker shuts down, your shares remain untouched in the depository.
• This system gives stronger legal ownership clarity compared to US “street name” custody.

⚖️ Quick Comparison

Scenario	🇺🇸 US – Whole Shares	🇺🇸 US – Fractional Shares	🇮🇳 India – Whole Shares
If broker fails	Shares still yours, transferable	Fraction must be liquidated to cash	Shares still yours, untouched in demat
Transfer to new broker	✅ Yes	❌ No (cash-out only)	✅ Yes
Risk level	Low	Medium (broker-dependent)	Very low

💡 Why US Investors Are Okay With Fractional Risk

1. Reputable Brokers + Regulation

• Fractional shares are offered mainly by large, well-regulated brokers (Fidelity, Schwab, Robinhood, Charles Schwab, etc.).
• These brokers are under the watch of SEC and FINRA, and any mismanagement could lead to huge penalties.
• Trust in the system + enforcement makes investors feel safe.

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2. SIPC Protection (Indirect Comfort)

• Even though SIPC does not directly cover “fractions” as securities at DTC, brokers still maintain 1:1 backing with whole shares.
• Investors believe: “My fraction is always backed by the broker holding real stock, so I’ll at least get the cash value back.”

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3. Accessibility Beats Technical Risk

• Without fractional investing, small retail investors couldn’t afford exposure to Amazon ($3,000+), Google ($2,000+), Tesla ($800+) back when these were high-priced.
• Fractions democratize investing — anyone with $10 can buy into the big names.
• For most beginners, the ability to invest outweighs the transferability risk.

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4. Low Practical Risk

• In reality, broker bankruptcies in the US are extremely rare.
• Big players like Fidelity, Vanguard, and Schwab are considered systemically safe.
• If a small fintech app collapsed, fractions might get liquidated into cash — but that’s still not a total loss.

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5. Fractions Are Usually Small Positions

• Most investors use fractional shares to invest spare change or small amounts.
• Even if a fraction had to be liquidated, the dollar risk is tiny compared to whole share portfolios.

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✅ Key Takeaway

US investors accept fractional share risks because:

• Trust in the regulatory system and brokers.
• Accessibility to expensive stocks.
• Low real-world risk of losing money.
• Worst case = you get the cash value, not zero.

That’s why fractions are marketed as a convenience feature, not a core ownership model.

📌 Why You Can’t Place Limit Orders on Fractional Shares

1. Exchanges Only Handle Whole Shares

• US stock exchanges (NYSE, NASDAQ) are designed to trade in whole share units.
• Order books (where bids/asks sit) don’t recognize 0.25 shares or 0.7 shares.
• So, if you wanted to place a limit order for 0.3 shares of Tesla at $200, the exchange wouldn’t know how to process it.

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2. Fractional Shares Exist Only at the Broker Level

• Fractions aren’t real exchange-traded assets — they’re just bookkeeping entries at your broker.
• The broker buys/sells whole shares in the market and then splits them internally to allocate fractions to clients.
• Since only the broker is managing fractions, you can’t directly interact with the exchange order book via a limit order.

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3. Execution = Market Orders Only

• To make fractional investing simple, brokers route them as market orders.
• Example: You say, “Buy $50 worth of Apple” → broker calculates how many shares that equals (say 0.21 shares) → they buy a whole Apple share in the market and allocate your 0.21.
• That’s why you can’t specify conditions like “only buy if Apple hits $200” on a fractional order — the broker would have to “simulate” a limit order system off-exchange.

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4. Liquidity & Fairness Issues

• If limit orders were allowed for fractions, the broker would need to manage mini order books for all fractional clients, which is complex and not standardized.
• It could create conflicts: e.g., if 100,000 clients want 0.1 shares of Tesla at $250, the broker has to decide whose order fills first when they buy a whole share.

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5. Regulatory Simplicity

• SEC/FINRA prefer keeping fractional shares as a retail-friendly feature with simple execution (market price, dollar-based orders).
• Allowing limit/stop/complex orders for fractions would make them look like independent securities — which regulators don’t want.

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✅ Key Takeaway

• Whole shares = tradable directly on exchanges → you can place limit/stop/complex orders.
• Fractional shares = internal broker allocations → only market orders work, since exchanges don’t recognize them.

That’s why fractional investing is great for long-term dollar-based investing but not for active traders.