Well? Why are (American) stock prices given in increments of one sixteenth of a dollar (e.g.: “On Wall Street today, General Motors traded at 57-and-five-sixteenths, down three-sixteenths”)?
I guess this question could break down into a couple more complicated questions:
Why are stocks priced incrementally at all; why not use a continuous scale? Obviously the NYSE has no problem with fractions of a cent.
Why sixteenths as the smallest increment? Why not some sensible fraction of a dollar (like, oh, tenths?)
actually, some online trading places are using decimals, and sometime soon the stock exchange will too. i think some stocks are already trading in tenths.
I located a couple of references to the fact that the practice of using fractions like eigths and sixteenths dates back to the 18th century, but nothing that really said why. (I blame the Swiss.) Be that as it may, the SEC has told all the markets to get moving and complete “decimalization” by early 2001 (cf: http://www.sec.gov/offices/marketr/34-42360.htm)
In your example of the falling GM stock, a shareholder with 50,000 shares would have lost $9,375 yesterday. I suspect that people holding large amounts of stock- especially volatile stock- want to know when they lose several thousand dollars in a single day.
If the drop wasn’t logged & reported until it fluctuated a quarter of a point, people wouldn’t see any change in their holdings until the reoprt came in that GM was down to 57.25 (again using your example of an opening price of 57.5). That means that instead of getting the somewhat unsettling news that you’ve lost almost 10 grand, you’d discover that you had lost $12,500, and it would probably take longer for this to be realized since it generally takes longer to see a 25¢ change than a 6¢ change in a stock price.
Thanks, omni-not. I really did look to see if this had been discussed before posting, but I think I looked up “stocks” and not “stock”, and so didn’t come across the thread you reference. Shame on me.
when the stock exchange was first started, the most common currency accepted everywhere in the US were the Spanish pieces of eight. So fractions or multiples thereof have been in use ever since.
Every one in a while you see a 256ths increments in the middle of the day(I’ve never seen a close like that however). I Have no idea if they have an actaully have a limit on how incremental they’ll go, or if they’ll just keep incremtalizing as the difference between sellers and buyers gets smaller.
Before the decimal metric system, pretty much all of europe and their colonies worked with fractions of different denominators. The adoption of the metric system in some countries put an end to that. Other countries decided they liked fractions better (or rather, they couldn’t be bothered to change). That is why you have fractions of inches, 128 fluid ounces in a gallon, etc.
Note that if computers had been invented before fingers, binary would have the preponderance and using decimal would be weird.
You are correct. There are six NYSE stocks trading in dimes now, of which the largest is FDX Corp. (FDX) (Seven, if you include both classes of Forest City Enterprises). There are also a few on the AMEX. The NASDAQ starts in March.
jwg:
I think you have it. The New York Stock Exchange (NYSE) is a very old institution, dating back to pre-revolutionary farmers selling stuff in an open market near a street close to a seawall: Wall Street. I’ve heard it from some various reputable sources that Spanish dollars, broken into eighth-pieces, were the first medium of exchange used there, so naturally they would report prices to the nearest $[sup]1[/sup]/[sub]8[/sub] (or $0.125 for you decimal people).
As I understand the situation, the US markets are the **only ** ones in the world that are not using decimals. The Australian Stock Exchange (ASX) trades in $0.001 increments for stocks that we would term “penny dreadfuls” i.e. < 10c per share.
A fair proportion of the world has also moved away from the open outcry system to purely electronic trading. The scenes of naked capitalism on the floor of Wall Street that we see often on our TV are becoming increasingly rare elsewhere.
I think a significant element in the reluctance to change to decimals is based on brokers belief that the larger the increment between bid prices, the larger their commission.