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. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What is the difference between shares outstanding and floating stock?

    Shares outstanding and floating stock are different measures of the shares of a particular stock. Shares outstanding is the ... Read Full Answer >>
  4. What are the advantages and disadvantages of listing on the Nasdaq versus other stock ...

    The primary advantages for a company of listing on the Nasdaq exchange are lower listing fees and lower minimum requirements ... Read Full Answer >>
  5. What is the difference between market risk premium and equity risk premium?

    The only meaningful difference between market-risk premium and equity-risk premium is scope. Both terms refer to the same ... Read Full Answer >>
  6. What is the difference between the QQQ ETF and other indexes?

    QQQ, previously QQQQ, is unlike indexes because it is an exchange-traded fund (ETF) that tracks the Nasdaq 100 Index. The ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    5 Predictions for the Chinese Stock Market in 2016

    Find out why market analysts are making these five ominous predictions about the Chinese stock market in 2016, and how it may impact the entire world.
  2. Economics

    How Interest Rates Affect The U.S. Markets

    When indicators rise more than 3% a year, the Fed raises the federal funds rate to keep inflation under control.
  3. Investing Basics

    Financial Markets: Capital vs. Money Markets

    Financial instruments with high liquidity and short maturities trade in money markets. Long-term assets trade in the capital markets.
  4. Economics

    The Ripple Effect: Interest Rates and the Stock Market

    Investors should observe the Federal Reserve’s funds rate, which is the cost banks pay to borrow from Federal Reserve banks.
  5. Investing Basics

    Calculating Floating Stock

    Floating stock is the number of shares a company has available for trade in the open market.
  6. Investing Basics

    How The Stock Market Works

    When you buy a stock, you buy a piece of a company.
  7. Investing Basics

    Financial Markets: Capital Vs. Money Markets

    Two commonly used components of the financial market are money markets and capital markets. Find out the similarities and differences between them.
  8. Stock Analysis

    Hedge Funds: Idiosyncratic Challenges to Fade

    With shifting monetary policy, we see renewed potential across many hedge fund strategies.
  9. Economics

    3 Economic Challenges Argentina Faces in 2016

    Learn about three challenges that the Argentine economy faces. How will President Macri manage capital controls, investor sentiment and fiscal deficit?
  10. Investing Basics

    The Five Biggest Stock Market Myths

    Stocks that go down must come up, right? Wrong. We bust this myth and four other common market misconceptions.
RELATED TERMS
  1. Futures Market

    An auction market in which participants buy and sell commodity/future ...
  2. Capital Markets

    Capital markets are markets for buying and selling equity and ...
  3. Equity Market

    The market in which shares are issued and traded, either through ...
  4. Market Value

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

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

    A nickname for the foreign bond market of the United Kingdom. ...
Hot Definitions
  1. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  2. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  4. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
  5. Godfather Offer

    An irrefutable takeover offer made to a target company by an acquiring company. Typically, the acquisition price's premium ...
Trading Center