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What Decimalization Means to
You
The New York Stock Exchange has been in business since 1792 and began using the 1/8 system
around the time that Spanish coins were cut into eight pieces and traded as
"bits". Now, more than 200 years later, the NYSE continues to use the 1/8
system, much to the chagrin of some investors. For these depositors, fractions are
complicated and out of date.
The good news for investors who dislike fractions is that stock decimal prices are on the
way to U.S. markets. While the markets and the financial services industry adjusts to the
idea and prepares for the change, the fact is that fractions will some day no longer be
used in U.S. markets.
How Decimals Affect Stocks
With many novice investors increasingly active in today's markets, Congress determined
several years ago that the industry should change from fractions to decimals. After
examining the impact of this proposal on securities trading, the Securities and Exchange
Commission determined that U.S. markets would switch from fractions in the near future. A
schedule is being determined that will take into account the potential issues of this
transition, including the understanding that some markets, including the NASDAQ, might not
be able to meet an ambitious deadline.
The pending change will introduce a new format for stock quotes. The goal is to make the
markets less intimidating for investors. Decimalization simply means that stocks will be
traded in the form of decimals, or dollars and cents, and not in fractions like they are
now. For example, a stock that is now quoted at 21 7/16 would become a decimal equivalent
of $21.44 when converted.
Decimalization will affect the size of the minimum price increment, or spread. The spread
is the difference between the "ask price" and the "bid price". The
"ask price" is the lowest price that a seller will sell the shares at any given
time. The "bid price" is the highest price a buyer is will to pay for shares at
any given time. For example, if decimalization results in pricing increments of five
cents, such as $21.05 and $21.10 and so on, there would be 20 price increments within a
dollar. Alternatively, penny increments, $21.01 and $21.02 and so on, would result in 100
increments within a dollar. This format could ultimately benefit investors.
When trading increments get smaller, spreads tend to narrow. By switching to smaller
increments spreads tighten. These changes decrease profits for middlemen such as market
makers, and lead to greater efficiency and better prices for investors.
A Nickel at a Time
The minimum tick size, or change in quote, on most markets has been a "teenie",
or 1/16, since the New York Stock Exchange reduced its minimum pricing value from 1/8 in
June 1997. That was the first change in the history of the NYSE and followed the lead of
other markets. Though other markets, including the NASDAQ, can quote in smaller tick
sizes, the current decimalization plan includes a phased-in approach with a fixed trading
increment of five cents a share for the first 30 days. In other words, the smallest change
in the quote would be a nickel. Later, market forces and the exchanges could change the
trading increment themselves.
How Decimals Affect Investors
Simply stated, decimals are coming soon to U.S. markets. For the average investor, this
means the markets could be less daunting. Investors will be able to concentrate more on
the performance of their investments without the distraction of fractions. With a change
to decimalization, stock quotes on U.S. markets will be more inline with the decimal
prices that are part of our everyday lives.
Susan Posey is an Investment Consultant
with IJL Wachovia in Columbus, Georgia. IJL Wachovia, a division of Wachovia
Securities, Inc., is one of the nation's largest regional full service brokerage firms,
offering a full range of investment services to investors. |
