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 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 used gold doubloons to facilitate trade. These doubloons were divided into two, four or even eight pieces so traders could count them on their fingers. You are probably thinking, "Hmmm…eight pieces for eight fingers, but a person has 10 fingers." But Spanish traders decided thumbs would not be included when counting currency. So, unlike currencies that have a base of 10, Spanish gold doubloons had a base of eight, meaning 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, which prompted the NYSE to adopt the denomination of 1/16, or a spread of 6.25 cents.

(To learn more, see: Getting to Know Stock Exchanges.)

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