Seeing as I’m currently in college and will soon be On My Own, I figured I’d better learn about investing the incredibally large ammount of money that I have. I’ve read about stocks, bonds, mutual funds, investment clubs, money markets, currency trading, various large mammals, interest rates, and counterfeiting (gotta have a fallback plan.) So my question:
Why in God’s name are stock prices in the US given in eighths of a dollar?!?!?!? Everything else I can think of uses the convenient 100th of a dollar, also known as a “cent.” So what’s the dope? Is there a good reason? Does this happen in other countries?
My WAG would be that is a hangover from the time when number crunchers were not commonly in use, so it was easier to deal with one eighth, rather than 0.125, or 0.03125 for a thirtysecondth.
An interesting WAG, but I don’t buy it. Though fractions are certainly easier in some cases, I would find dealing with tenths, twentieths, and hundredths much easier than eighths. After all, at some point someone has to pay for the stock, and you don’t write a check for “five and three eighths dollars.” (Though you probably could, come to think of it.)
I understand that you might find it easier, but thinking about folk fifty or a hundred years ago, maybe they preferred fractions. What the hell do I know anyway. A search turned up, er, this thread. Really useful so far
They stopped quoting in 8ths a couple of years ago. It’s in sixteenths (which, of course, looks like 8ths half the time).
Why either? Tradition. The earliest stock exchanges were set up before the dollar was established. I’m a bit fuzzy, by I seem to recall that it was based on the Spanish system of pieces of eight (eight something-or-others made one thing-a-ma-bob).
Why not change? Partially tradition. Partially because you could make more money selling the stock in eighths rather than tenths. The stock specialist (or market maker for NASDAQ) buys and sells a share of stock for two different prices. They might buy at 18 and sell at 18.125 (which means the customer buys at 18.125 and sells at 18). If it went to tenths, the spread would be only .1 versus .125. That extra little bit helps.
Eventually, complaints about the spreads forced the markets to go to quoting in sixteenths. Why not cents? I don’t know. Probably tradition again.
As far as calculating is concerned, most stock are traded in lots of 100 shares, so 12.125 become $1212.50, an easy number to write a check for. Even in 16ths, 12.0625 becomes $1206.25. Odd lots (not in multiples of 100) would cause calculation problems, but people who trade in odd lots pay higher commissions and are generally looked down upon by stock professionals. (There’s actually one market indicator that out-and-out assumes odd-lot buyers are morons – you do the opposite of what they’re doing.)
Halves, quarters, eighths, etc. come about naturally when people are involved. Picture two guys haggling over a stock price, and they’re stuck at a dollar apart in what they’re willing to pay/take. So they compromise on halfway between. Later, someone else compromises at a halfway point there.
That’s pretty much how the whole English measurement system happened.
You’re right that it has no place on a modern market, and the NYSE is planning to go to a decimal system. I saw some stock that I own one day close at a price of something like 115 and 91/128. Now that’s ridiculous!
RealityChuck nailed it. The system harks back to the Spanish pieces of eight. Real (Rial?) comes to mind.
You could cut the coin into 8 pieces and it would still be recognized and accepted.
The SEC has two plans for instituing decimal pricing.
One would reguire all exchange-listed securities to use decimal pricing by September 4, 2000.
The alternate plan would be a phase-in of some securities on September 4 and then have all securities (even ones not listed on exchanges) use decimal pricing on March 31, 2001.
NASDAQ seems to be complaining the most about decimal pricing saying that its computer can’t handle decimal pricing.
In my handy copy of the Inter-Exchange Technical Commitee Specification v2.1 are listed price formats for futures and options markets. These include such gems as Half 64ths and Quarter 32nds - both of which are displayed differently from 128ths for which thay are equivalent.
For example 123.5546875 would be written as:
123071 in 128ths
123355 in half 64ths
123177 in quarter 32nds
This may seem funny but I have to write programmes which understand this shit.
