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's the smallest number of shares of stock that I can buy?

    Many people would say the smallest number of shares an investor can purchase is one, but the real answer is not as straightforward. ... Read Answer >>
  2. What's the smallest number of shares I can buy?

    Unlike mutual funds, which can be purchased in fractional units, shares of stock cannot be divided. So, the smallest number ... Read Answer >>
  3. How does a company switch from one stock exchange to another?

    A publicly traded company can, in fact, switch to a stock exchange that it believes will be favorable to its financing efforts. ... Read Answer >>
  4. 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 >>
Related Articles
  1. Personal Finance

    Small Cap Stocks' Pricing Overhaul

    With SEC approval, up to 1,200 U.S. stocks will now have their prices quoted in increments of 5 cents, rather than 1 cent. Is this good for investors?
  2. Investing

    Facebook Messenger Can Now Understand Spanish

    Facebook's new 'M' AI assistant in Messenger can now make suggestions in both English and Spanish.
  3. Investing

    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.
  4. 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.
  5. Insights

    The Birth of Stock Exchanges

    Learn how British coffeehouses helped give rise to the juggernaut that is the NYSE.
  6. Trading

    Trading Calendar Spreads In Grain Markets

    Futures investors flock to spreads because they hold true to fundamental market factors.
  7. Insights

    How Commodities Spread Betting Works

    Commodity spread betting is a way to speculate on price movements of various commodities. Here's how it works.
  8. Personal Finance

    What is Fractional Reserve Banking?

    Fractional reserve banking is the banking system most countries use today.
  9. Trading

    Retail FX Spreads: Do They Even Matter?

    Learn how retail forex spreads affect your ability to trade currencies.
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. Teenie

    In trading, a measure of value representing one sixteenth of ...
  6. New York Stock Exchange - NYSE

    A stock exchange based in New York City, which is considered ...
Hot Definitions
  1. Short Covering

    Short covering is buying back borrowed securities in order to close an open short position.
  2. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  3. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  4. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  5. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  6. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
Trading Center