Up until the year 2000, security prices were always given in the form of fractions. While this was an effective way of pricing, and though most investors had no trouble understanding what the price was in real dollars, a decision was made to standardize the pricing of securities in the format of all other pricing. This conversion from fractions to decimals is known as decimalization.
Though the process of decimalization seems fairly simple, it is more complicated than what most may have learned in schools about converting decimals to fractions. Software and other applications written specifically for securities were designed to accommodate fractions, not decimals. Therefore, decimalization was a process that could not take place overnight.
One of the first to start its decimalization conversion was the NASDAQ stock market. It received an order to do so on 8 June 2000 and had concluded its transition by 9 April 2001. Due to the time allowed to make the conversion, Laura Unger, the acting chair of the Securities and Exchange Commission, reported to the U.S. Congress in May 2001 that it caused no significant disruptions or hardships.
The main advantages to decimalization are exact pricing, less confusion among investors and increased competition with overseas markets. Indeed, Unger went on record to say nearly all of those things were accomplished. Now, in the years since decimalization occurred, there is very little debate that it was the best thing to do for all markets.
While some may think it is easy to understand the system of fractions, it is not so easy in all cases. For example, nearly everyone knows that a price of 25 and one-half would mean $25.50 US Dollars (USD). Fractions such as a quarter, half and three-quarters are fairly easy. They equal $.25, $.50, or $.75 USD. But what about one-sixteenth of a dollar? This can be more confusing for the average investor. Decimalization takes all ambiguity out of the question.
Decimalization also helped in investors by stating clearly what the exact price of a stock was. When prices were quoted in fractions, the smallest increment was one-sixteenth of a dollar. While that may seem insignificant, when one is buying thousands of shares of stock, even a few cents can add up to a very big number. The accuracy that naturally comes along with decimals not only helped investors keep better track of what they were paying, but also helped increase competitiveness overseas, where markets had moved away from fractions, or were planning on a conversion.
