5.1: Decimals

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On January 29, 2001, the New York Stock exchange ended its 200-year tradition of quoting stock prices in fractions and switched to decimals.

It was said that pricing stocks the same way other consumer items were priced would make it easier for investors to understand and compare stock prices. Foreign exchanges had been trading in decimals for decades. Supporters of the change claimed that trading volume, the number of shares of stock traded, would increase and improve efficiency.

But switching to decimals would have another effect of narrowing the spread. The spread is the difference between the best price offered by buyers, called the bid, and the price requested by sellers called the ask. Stock brokers make commissions as a percentage of the spread which, using fractions, could be anywhere upwards from 12 cents per share.

When the New York Stock Exchange began back in 1792, the dollar was based on the Spanish real, (pronounced ray-al), also called pieces of eight as these silver coins were often cut into quarters or eighths to make change. This is what led to stock prices first denominated in eighths. Thus, the smallest spread that could occur would be 1/8 of a dollar, or 12.5 cents. That may seem like small change, but buying 1000 shares for $1 per share with a $0.125 spread is a $125.00 commission. Not bad for a quick trade!

Decimalization of stock pricing allowed for spreads as small as 1 cent. Since the number of shares traded on stock market exchanges have skyrocketed, with trillions of shares traded daily, stock broker commissions have not suffered. And the ease with which investors can quickly grasp the price of stock shares has contributed to the opening of markets for all classes of people.

In this chapter, we’ll learn about how to compute and solve problems with decimals, and see how they relate to fractions.