The Stock Market Uses Decimals Too!

  When I was in school, one of the common examples of needing to know fractions included the stock market because they would show everything in eights.  For instance Apple might go up 1 3/8 points while General Electric might drop 1/8 of a point.

Just a bit of background on the stock market and why it used fractions rather than decimals originally.  The New York Stock Exchange was formed back in 1792 due to the Buttonwood Agreement.

 24 leading bankers, brokers, and merchants agreed to create a central clearing house for trading stocks and securities.  These men modeled their exchange on the one in Spain after checking out others in Europe because the United States currency had been based on the Spanish Real.

The Spanish silver dollar or Real was divided into two, four, or eight parts which is where the term "pieces of eight" came from because they could count them on their fingers. The Spaniards did not count using their thumbs like the English did.  So when the stock market began, they based the smallest increase on 1/8 of a dollar or 12.5 cents. In other words, if one stock dropped 1/8th you'd only loose 12.5 cents but what if you had 100,000 shares of the stock you'd loose $0.125 x 100,000 or $12,500 which adds up. 

This spread could cause people to gain lots of money when dealing in millions so they dropped the increase or spread to 1/16 or 6.25 cents.  Along the way, some stocks used a spread of 1/32 or 1/64 to keep it much smaller.

In 1997, the Common Cents Stock Pricing Act was passed by congress to make it easier for people to understand the pricing system since more and more people were investing in it.  Although, stocks began changing over in August 2000, it took till February 2001 for all 3025 companies listed on the NYSE to convert from fractions to decimals.  This change encompassed about 280 million shares.

Two of the things this did was to:
1. Investors could save over $1billion or more each year.
2. Investors could save on the cost of commission since commission was often based on the price of the stock.
3.  The United States is more compatible with other stock markets who have been using decimals for years.
4.  The number of transactions handled by the NYSE is able to double using decimals instead of fractions.

This was just a look to see why the stock market used fractions for most of its life and why it switched to decimals.

Let me know what you think, I'd love to hear.  Have a great day.