Comments on: Why are US stock pricing conventions so sticky?

By: Machev

Machev — Fri, 20 Jul 2012 21:40:12 +0000

In addition to mutant_dog’s reasons (odd lots, possibility of doubling), I wonder if some is that individual investors often have a fixed amount to invest at a given time, and want to minimize left-over funds. E.g. I often have $2K to invest. At $575/share, there’s $275 “left over,” versus only $22 at $23/share.

That’s a particular heuristic I’m very guilty of — so, I end up just buying index mutual funds where I can have fractional shares.

By: mutant_dog

mutant_dog — Mon, 25 Jun 2012 15:49:30 +0000

Individual investors do not want to be seen as “odd-lotters”, so that’s a part of it. Another part is, naively, the investor often thinks in terms of a stock price that can double; it is easier to imagine a $20 share going to $40 than it is imagining a $575 per share price increasing to $1150. (I must admit I fall for that particular heuristic more that I’d like.)

By: maynardGkeynes

maynardGkeynes — Sun, 24 Jun 2012 14:02:15 +0000

DOJ Antitrust settled a major price-fixing case against NASDAQ in the 1990s involving bid-ask spreads. Academic studies showed that NASDAQ listed stocks were not traded at odd 1/8ths, ie 10 and 1/8ths, 10 and 3/8th. DOJ alleged a conspiracy to widen the profit margin by prohibiting trades at odd eighths. (in effect, the minimum spread was 1/4.) NASDAQ’s defense was that wider spreads were needed to provide liquidity. However, NASDAQ settled with a stipulation not to set spreads anymore, and also paid some hefty damages. I imagine this case, even though not adjudicated, would prohibit the industry from actions to keep spreads above a certain level.

By: TFF

TFF — Sat, 23 Jun 2012 16:29:23 +0000

Are there any practical reasons these days not to buy shares in odd lots? Four shares of Apple might not sound very exciting, but I don’t see how a 25:1 split would change anything.

By: Moopheus

Moopheus — Sat, 23 Jun 2012 14:32:52 +0000

Maybe it has something to do with how much stock people think they need to buy, or can afford to? It may be that Apple’s stock price isn’t unreasonable in p/e terms, but no one wants to buy only four shares. But you could buy 100 shares of a $20 stock for the same investment. I say this because the last time I had the urge to buy stock, it was Apple when it was 16, and I had no money. I would have taken 100 shares at that price if I could have spared it, but I was totally broke.

By: TimWorstall

TimWorstall — Sat, 23 Jun 2012 11:19:55 +0000

Can’t remember whether it was at A Level or when doing the Blue Button exams….all too long ago. Mebbe even finance part of the LSE degree. But the point was made that the US markets seem to prefer $10 to $50 as a price and the London markets £1 to £10.

But the point was made that the desire to be in these trading bands was what might justify a stock split or consolidation.

No one ever did explain why the bands should be different in each country. But it was used as a reason why ADR’s are normally a multiple of UK shares.