DECIMAL PRICING--BOON FOR INVESTORS?
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.
What Will Change
Until now, stock exchanges have used a quote system based on a global currency of the late 1700s, the Spanish "pieces of eight." These coins could literally be broken into eight pieces to make change.
Under this quote system, stocks traded in increments of 1/8 of a dollar, or 12 1/2 [cts.]. In 1997, U.S. stock exchanges narrowed the increment to 6 1/4 [cts.] 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.
The change began in August 2000 with a pilot program of 13 stocks--seven at the New York Stock Exchange and six at the American Stock Exchange. The NASDAQ began moving to decimals in March 2001, and all stocks were to be quoted in decimals by April 9, a deadline the Securities and Exchange Commission set.
Changing to a decimal system seems a common-sense move. Indeed, it brings U.S. markets in line with the major foreign markets, all of which trade in decimals.
What the Change Could Mean
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 [cts.]. 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.
Some market experts fear decimal pricing could complicate decision-making for investors who use limit orders, which are requests by investors to trade at a specified price or better.
With fractional pricing, an investor using a limit order specified prices in 6.25 [cts.] increments. Under decimal pricing, as we've seen, more increments exist between prices. An investor using a limit order would need to choose in increments of 5 [cts.] instead of 6.25 [cts.]. If exchanges go to penny increments, an investor's choices would increase further. Yet, increased choice generally is a boon for investors; it remains to be seen what effect the move to decimal pricing will have on this type of trading.
A Benefit for Investors
All the possible consequences of decimal pricing certainly can't be predicted. But 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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|Title Annotation:||investment tips|
|Publication:||PN - Paraplegia News|
|Date:||May 1, 2001|
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