A:

Before April 9, 2001, when the Securities and Exchange Commission ordered all U.S. stock markets to switch to the decimal system, prices were reported and stocks were denominated in fractions - in one-sixteenths (1/16), to be exact. While it seems silly that it took so long for the change to occur, the earlier technique of fractional pricing is not as arbitrary as it may seem.

Almost 400 years ago, Spanish traders would use a currency of Spanish gold doubloons to facilitate trade. These doubloons were divided into two, four or even eight pieces so that traders could count them on their fingers. You are probably thinking, "Hmmm … eight pieces for eight fingers, but a person has 10 fingers." Yes, but those Spanish traders decided that thumbs would not be included for counting this currency. So, unlike currencies that have a base of 10, Spanish gold doubloons had a base of eight, so the smallest denomination was 1/8 of a doubloon.

When the New York Stock Exchange (NYSE) started out more than 200 years ago, it was based on none other than this Spanish trading system. So trade began with this base-eight denomination, and 1/8 of a dollar, or 12.5 cents, became the spread, or the smallest amount a stock could change in value. Now, a 12.5 cent spread doesn't seem bad when the one share you own goes down 12.5 cents. Even if you had 10 shares, you would lose only $1.25 (10 x 12.5 cents). But what about those who had to trade in excess of one million shares? Obviously, the wide spread could produce gigantic losses. Eventually, this problem prompted the NYSE to adopt the denomination of 1/16, or a spread of 6.25 cents.

To read more, check out Getting To Know Stock Exchanges and The Tale Of Two Exchanges: NYSE And Nasdaq.

RELATED FAQS
  1. Where did the term 'pip' in currency exchange come from?

    Learn the definition of a pip, what it means in the scope of currency exchanges and how to determine its value. Find out ... Read Answer >>
  2. What is the difference between pips, points, and ticks?

    Learn the differences between points, ticks and pips and how each are used by investors to measure price changes in stocks, ... Read Answer >>
  3. Why is the Nasdaq more volatile than the NYSE?

    Learn about the stocks that are traded on the Nasdaq stock exchange, and discover the Nasdaq's relative volatility level ... Read Answer >>
  4. How do I invest in the Nasdaq or the NYSE? Is it even possible? Would I want to? ...

    The Nasdaq and the NYSE are stock exchanges that trade securities. Nasdaq stands for National Association of Securities Dealers ... Read Answer >>
  5. What are all of the securities markets in the U.S.A?

    There are three major U.S. financial securities markets which are: New York Stock Exchange (NYSE): NYSE is a stock exchange ... Read Answer >>
  6. What does it mean when my broker says that shares are for auction?

    An auction market is one in which stock buyers enter competitive bids and stock sellers enter competitive offers at the same ... Read Answer >>
Related Articles
  1. ETFs & Mutual Funds

    The Top 5 ETFs to Track the IBEX 35 for 2016 (EWP, HEWP)

    Discover what the available ETF choices are for investors seeking exposure to the Spanish stock market that corresponds to the benchmark IBEX 35 Index.
  2. Markets

    The Birth Of Stock Exchanges

    Learn how British coffeehouses helped give rise to the juggernaut that is the NYSE.
  3. Investing

    How To Calculate The Bid-Ask Spread

    It's very important for every investor to learn how to calculate the bid-ask spread and factor this figure when making investment decisions.
  4. Investing

    What Moves Stock Prices?

    Even if you don't invest a cent in stocks, you should still understand how the stock market works. Find out why.
  5. Markets

    Stocks Basics: How Stocks Trade

    Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. Some exchanges are physical locations where transactions are carried out on a trading ...
  6. Investing

    Stock Exchanges Around The World

    We tell you about five of the most popular stock exchanges from around the globe.
  7. Trading

    Traders: Which Markets Should You Trade?

    Being aware of other markets and other trading methods can help traders fine tune methods, save costs and add profits.
  8. Trading

    Top 7 Questions About Currency Trading Answered

    Whether you're puzzled by pips or curious about carry trades, your queries are answered here.
  9. Trading

    Trading Calendar Spreads In Grain Markets

    Futures investors flock to spreads because they hold true to fundamental market factors.
  10. Investing

    What is the Stock Market?

    A stock market is where shares in corporations are issued and traded. Stock markets are key components of a free market economy.
RELATED TERMS
  1. Decimalization

    A system where security prices are quoted using a decimal format ...
  2. Decimal Trading

    A system in which the price of a security is quoted using a decimal ...
  3. Fractional Share

    A share of equity that is less than one full share. Fractional ...
  4. Ask

    The price a seller is willing to accept for a security, also ...
  5. Denomination

    A classification for the stated or face value of financial instruments, ...
  6. Internationalization

    The designing of a product in such a way that it will meet the ...
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center