Firms should avoid using the term fractional share when referring to derivatives on fractions shares. These instruments are not corporate shares. ESMA would declare such misleading use of the term in violation of MiFID II.
These derivative products must be disclosed to all costs and fees, direct and indirect, of the products or services. This includes all costs and fees involved in creating fractional shares as well as markups and markdowns that are proportional to the market price of the corporate share.
According to ESMA, a “fractional share” is an investment tool that allows investors to participate in a company’s performance by tracking the share price while being accessible at a lower cost, equal to the proportionate value of the underlying share. Investors can typically benefit from dividend payments, but generally they do not have voting rights.
Retail investors are protected by ESMA, which requires companies that offer trading on these particular derivatives to take additional precautions. These include clear explanations about what these derivatives are, how they work, the costs involved, and their management.