I recently read that a prominent Wall Street analyst was reportedly stunned to hear that the price of his morning bagel had jumped from $1 1/4 to $1 9/16. If that sounds bizarre, ponder this factoid: the U.S. stock market is the last major exchange in the world that still uses fractional pricing - a tradition whose roots trace back to the currency of Spanish colonies in the New World. Fortunately, that is beginning to change.
On Aug. 28, in compliance with SEC requirements, the U.S. securities industry began to shift away from its current fraction-based pricing system in favor of a decimal-based format - a process known as decimalization.
That means that stocks will eventually be priced in dollars and cents rather than dollars and fractions. Initially, a group of 13 stocks made the change, followed by 80-100 more by Nov. 6 and finally the entire U.S. equity and option trading markets by April 9, 2001.
Decimalization is designed not only to bring the U.S. in line with the rest of the world's markets but also to make investing in stocks more understandable. Rather than converting fractions to cents, investors can concentrate on trading, which will presumably increase volume.
However, I feel the real benefit of decimalization is its reduction of price increments at which investors can buy and sell stocks. Here's why: To buy or sell a stock on the open market, an investor usually must go through a 'market maker' - a person who buys and sells significant quantities of securities in order to keep the market liquid. Consequently, stocks carry a bid price and an ask price. The 'bid' represents the price at which a market maker is willing to sell a stock to another investor, and the 'ask' constitutes the price at which a market maker is willing to sell a stock to another investor. The difference between the two is know as the 'spread' and is usually taken as profit by the market maker.
With fraction-based pricing, the lowest price increment is 1/16th of a dollar, which means that the smallest spread is 6.25 cents. However, after the move to decimals, the spread can go as low as one penny, which produces a better price for investors. This 5.25-cent difference may seem insignificant, but viewed in the backdrop of the enormous number of shares that change hands every day, it translates into billions of dollars in savings for investors each year.
In the long run, I think decimalization will probably benefit everyone. Investors will be able to understand the market better and receive better prices, while market makers will presumably make up for the diminished spreads with the projected increase in volume. To learn more about the stock market or any other type of investment, contact a financial consultant, and he or she will be happy to answer any questions you may have.
In regards to year-end tax planning, I feel you should make up a "to-do" list to accomplish before the year is out. This planning could save you time and money this tax season.
For instance, you may want to take investment losses to offset gains by selling stock or other securities at a loss. If capital losses exceed gains, you may deduct the excess losses dollar-for-dollar against income up to $3,000 ($1,500, if married and filing separately). Any undeducted losses can be carried over to future years.
Another potentially effective strategy is to "swap" securities to take losses and enhance your portfolio. The new investment may be similar, but not have "substantially identical" characteristics as the old investment you sold at a loss.
Lastly, consider selling investments with the highest cost basis first when selling securities with multiple cost-basis.
According to IRS regulations, if you do not provide specific instructions the shares you have held the longest will be sold first. For information, call me, Bill Creekbaum, CFP at 689-8729 or e-mail me at william.a.Creekbaum@rssmb.com.
William Creekbaum, MBA, CFP, a Carson City resident, is senior consulting group associate of Salomon Smith Barney, a financial services firm serving Northern Nevada.