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. Why would a corporation issue convertible bonds?

    Discover how corporations issue convertible bonds to take advantage of much lower interest rates as a result of a conversion ...
  2. What is the difference between shares outstanding and floating stock?

    Learn about shares outstanding, floating stock, how to calculate a company's floating stock and the difference between shares ...
  3. What are the advantages and disadvantages of listing on the Nasdaq versus other stock ...

    Discover some of the primary advantages and disadvantages that exist for companies listed on the Nasdaq exchange rather than ...
  4. What is the difference between market risk premium and equity risk premium?

    Read about the differences between equity-risk premium and market-risk premium, two similar concepts that refer to risk-adjusted ...
Related Articles
  1. Investing Basics

    4 Things You Didn’t Know About Southwest Airlines

  2. Markets

    Why Colt Went Out of Business

  3. Stock Analysis

    AT&T: Just Boring Or Bad?

  4. Investing

    Why Do Companies Choose NASDAQ for Their IPO?

  5. Investing Basics

    Is a Stock's Trade Volume Important?

RELATED TERMS
  1. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  2. Lean Enterprise

    A production and management philosophy that considers any part ...
  3. Bulldog Market

    A nickname for the foreign bond market of the United Kingdom. ...
  4. Float Shrink

    A reduction in the number of a publicly traded company’s shares ...
  5. Capital Strike

    A refusal of businesses to invest in a particular sector of the ...
  6. Gray Market

    An unofficial market where securities are traded. Gray (or “grey”) ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!