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Money Talks: Decimal Pricing—Boon for Investors?

Reprinted from PN May 2001
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U.S. stocks are trading in decimals—good old dollars and cents—instead of the fractions that exchanges used for centuries.

For anyone who has ever tried to convert a stock price of, say, 32-3/8 or 12-15/16 into an actual buy or sell price, the conversion comes as a welcome relief. Trades will be more easily calculated and stock tables more easily read.

Beyond that, however, securities regulators are hoping the change will carry an even greater advantage for investors: better prices for individual trades.

Until now, stocks traded in increments of 1/8 of a dollar, or 12 and a half cents. In 1997, U.S. stock exchanges narrowed the increment to 6 and a quarter cents when they began quoting trades in sixteenths rather than eighths.

Now, stock exchanges are switching to a decimal system in which trades are recorded in dollars and cents, the way mutual-funds quotes are. Instead of trades of 45-1/2, investors see 45.50. Fractions are rounded to the nearest cent; for example, 12-1/8 is 12.13 rather than 12.125.

Beyond the convenience of executing trades in dollars and cents, the conversion to decimal pricing is expected to bring savings for investors. That's because the spread between a stock's bid and its "ask price" is expected to narrow, allowing for better pricing.

In a stock trade, the brokerage or dealer who makes a market in a stock bids to buy shares from investors at one price (bid) and offers to sell to investors at a slightly higher price (offer or ask). The spread, or difference between the two prices, comprises the profit the dealer makes for maintaining an orderly market in the stock.

When stocks are traded in fractions, the smallest increment between stock prices is usually 1/16 of a dollar, or 6.25 cents. For example, the bid price on a stock might be $10, while the ask price could be $10.0625.

Under decimal trading, investors will be able to trade at increments of five cents for most stocks, and eventually perhaps in pennies. By narrowing the spread, decimal trading could save investors money by lowering the ask price. For example, instead of an ask price of $10.0625 on the stock mentioned previously, the ask price could be $10.05.

While a savings of a penny per share doesn't sound like much, it can add up. By lowering your investment costs even a penny at a time, you have the opportunity to increase your total return over time.

Most experts agree investors stand to benefit from a narrowing of a stock's spread. If this happens once exchanges have made the change, the move to decimal trading will be a welcome consequence.

Rosemary Berkery is senior vice president and director of the Merrill Lynch Private Marketing Group. Visit the company's Families of Children With Disabilities Program Web site, www.plan.ml.com/specialneeds. Contact: David Cleary, financial consultant, Merrill Lynch Private Client Group, (800) 937-0405 / (949) 859-2932 / DCleary@pclient.ml.com.

 

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Money Talks: Decimal Pricing—Boon for Investors?

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