BAJAJ BROKING
April 02, 2025
7 mins read
Whenever stocks are bought by an investor, the stocks get credited to his demat account in whole numbers. A half stock is half the quantity of an entire stock, i.e., the security is not sold at a 50% discount but the quantity sold is 50% of one stock and the value of the half stock gets adjusted proportionately. The returns from a half stock will also be halved according to the quantity. This is similar to the concept of buying a half-plate rice bowl instead of a full-plate rice bowl wherein the price gets adjusted as per the quantity ordered. Note that the idea behind half stock is not analogous to ordering a full-plate rice bowl at 50% discount, but instead, is analogous to the idea of ordering a half-plate rice bowl. Investing in half stocks is an attractive option for those who are looking forward to affordable options. Half stocks also allow a company to raise money by only issuing half the regular number of shares.
On the Indian stock exchange, you are not permitted to buy half stocks or fractional shares as per current regulations but in other stock markets, such as in the United States, you can readily buy half stock. Though the definition of half stock is applicable to both common stocks and preferred stocks, these most commonly pertain to preferred stocks. Before going into further details, let us quickly review the differences between a common stock and a preferred stock. Holders of common stocks are part owners of the company and have voting rights, but in the order of ownership priority, they are at a lower level than holders of preferred stocks. If the company is to be liquidated, common shareholders have claims on company assets only after the claims of bondholders, preference shareholders, and debt holders have been settled.
Therefore, preferred stockholders have higher claims on a company’s assets than common stockholders. There is no obligation on the company to pay dividends to its common stockholders. But for preferred stockholders, there is an implicit obligation on the company to pay dividends because preferred stockholders expect rewards for this higher level of company ownership. With that in place, let us read more to understand the fundamentals of half stock, how investors can use half stock, examples of half stock, and whether half stocks are the right investments for you.
The market valuation for a common stock is typically the same either for an entire unit of the common stock or for a half stock because the stock value is usually related to the company’s growth prospects. Since par value is more important in determining the value of the dividend, it is more important for a preferred stock. Though preferred stocks have a higher claim on a company's assets than common stocks in case of liquidation, the holder of a half stock would receive lesser value than a holder owning a full preferred stock. Though you can buy a preferred stock in India through IPO or FPO or through secondary market listing, you can never buy a half stock as it is not allowed under current rules.
For half stock, it would be a good idea to understand stocks and bonds. Stock prices are volatile depending on different market conditions such as economy and sentiment. Stocks can trade at prices that are lower than or higher than their face value. While investing in stocks, the face value or the par value does not matter. But these values do matter while earning dividends because a stock’s dividend is usually a percentage of its face value. Suppose a dividend stock of company X has a face value of ₹3200 and it decides to issue half stock. Now, prospective investors can become the owners of those stocks more affordably at ₹1600. When company X declares a dividend of 20%, those investors will earn ₹320 instead of ₹640 per share. Similarly, bonds can trade at values higher or lower than their face value depending on interest rate changes and the face value of the bond is important for investors because the face value determines the quantum of stable income.
There are many ways in which investors can use the idea of half stock in their investment strategies as mentioned below -
A half stock becomes a cost-effective option for an investor if he wants to test the waters in a particular sector or industry without being overexposed. Long-term investors can consider half stocks as a route to build positions without investing too much capital in one go.
Half stocks also help in portfolio diversification with limited capital. For instance, if an investor is overinvested in debt funds and wants to diversify to equities, half stocks could serve as an entry point to equity investing.
For a short-term investor or a trader who trades on an intraday basis, receiving half the dividend by owning a half stock may not matter. This is because such an investor or a trader looks to earn profits from the day-to-day price differences instead of earning fixed and regular returns from dividends on a long-term basis. For a long-term investor, this matters because the dividend returns from a half stock will be significantly lower than owning a full dividend stock.
Preferred shares are generally valued more than common shares and half stocks provide an opportunity to an investor to become an owner of preferred shares more affordably. Owners of preferred shares have a higher claim on company assets in case of liquidation than those of common shares.
A half stock could also serve as an entry point for investors to high-risk companies with a strong growth appetite. Since investors can own half stocks of preference shares for such high-risk companies. Even if the investment does not work out and the company closes down its doors, still those half stock owners get priority on company assets over common stockholders and their capital is protected.
Half stocks usually have half the face value of a company’s preferred stock. Let’s suppose that company Z has a face value of ₹500 for its preferred stock. Now, the company decides to raise money by issuing half stocks of its preferred shares. So, an investor who wants to be the holder of the half stock has the opportunity to invest ₹250 for half stock and become an owner of the preferred stock. In the hierarchy, preferred stocks will always be given preference over common stocks in case the company goes bankrupt. The dividend generated will also be half of what is generated from a complete preferred stock. Therefore, a half stock allows a company to raise more money without diluting more equity. It also allows investors to become owners of preferred stocks without investing substantial capital.
Whenever the investor is evaluating whether to invest in half stocks or not, there are some considerations that he needs to keep in mind. First, he needs to consider whether the half stocks pertain to bonds or shares. There could be a case where the company is in a financial crunch because of short-term and long-term obligations. In such a situation, if the company issues a half stock either through preferred stocks or bonds, then the investor should take a step back and give his investment decision a second thought. Raising money through half stock represents a desperate measure on the part of the company.
The positive side of the story could be that the company requires additional capital for setting up greenfield projects and investing in research and development. In that case, issuing half stocks through preferred stocks or bonds can signal future growth and investors may see an opportunity to earn additional return on investment on those projects. A company could also issue half stocks in response to market scenarios such as competition landscape, regulatory concerns, technology upgradation, and changing consumption patterns. Investors should consider the strengths, weaknesses, and opportunities of the company while choosing to invest in half stocks pertaining to such market scenarios. An intention to raise capital for technology upgradation or beating the competition signals a proactive intent than a reactive intent as in investment in response to regulatory concerns.
Investments in the stock market are inherently risky and investors must be well aware of the pros and cons of owning half stocks either through bonds or preferred stocks of a company. Half stocks have benefits for the issuing company as well as prospective investors. However, investors must always evaluate the reasons behind issuing a half stock. You need to do your background research, consider your investment goals and risk profile, and finalize your investment capital before choosing to go ahead with investing in half stocks.
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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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Half stocks are generally issued by a company to meet its obligations or for some capital investments without much dilution of its equity. Half stocks refer to 50% ownership of an entire stock and do not refer to a price discount. Therefore, the benefits of dividends from half stock will also be proportionately halved for investors holding half stocks.
Half stocks are usually 50% of an entire preferred stock. Preferred stocks differ from regular stocks because they grant more ownership of the company. Since half stocks are essentially preferred stocks, the owners have a higher claim on the company assets than owners of regular stocks in case the company goes bankrupt. When a company liquidates, the order of preference is bondholders, owners of preference shares, debt holders, and then finally the owners of regular stock.
If an investor wants to seek exposure in a new company or a new sector, then half stocks represents a cost-effective manner for such new exposure. The investor need not lock-in significant capital for buying those half stocks. Also, an investor looking to diversify his portfolio can consider half stocks issued by a company through preferred shares or bonds. Being an owner of half stock through preference shares also provides an investor preferred ownership of a company compared to regular stockholders.
There are risks associated with half stock, and as an investor, you need to thoroughly research the reason for issuance of half stock. A company attempting to pay off its short-term and long-term obligations by capital raised through half stock is a red flag for any investor. Also, if there is a regulatory compliance issue and the company needs significant capital for upgrading its internal systems and processes for compliance, it points to a lack of proactive approach on the part of the company. Investors must carefully analyze the pros and cons of investing in half stocks before making the investment decision.
As per current regulatory guidelines, investing in half stock or any fractional shares is not permitted in India. Though the SEBI has written to the government of India to allow trading of fractional shares, as of now, there has not been any clarification or implementation to that effect.
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