Stock Prices 101

Until online stock trading became popular, stock prices were quoted in fractional dollars rather than dollars and cents. For example, a stock trading for $32.50 would be listed as $32 ½. These fractional stock quotes went as far to go to 1/32 of one dollar or about three cents. It soon became difficult to use computer modeling and computerized investment strategies on fractionalized stock quotes, so eventually the prices were quoted in dollars and cents.

Fractional Stock Market Quotes

Fractional stock quotes were very favorable to stock brokers who were happy to take the additional spread. Today, bid and ask prices on the most popularly trader stocks diverge by just a few cents; when fractional stock quotes existed, the huge spread between buy and ask was very favorable to brokers.

Imagine having to bid an additional ¼ point or 25 cents just to get an order filled. Even then, fractions such as the 1/16 or 1/8 were favorable to brokers because they generally would round up the stock price and profit the fractions of pennies that existed on the big board. In many ways, the new stock prices help day traders who were accustomed to paying large spreads and commissions by eliminating some of the spread they previously paid. In this way, traders have a better chance at succeeding and being profitable than they did less than a decade ago, when the stock market was adjusted to pennies rather than fractions.

Does Stock Price Really Matter?

The price of a stock is largely irrelevant when not compared to the total shares outstanding. Because a company has a stock price of $30 per share does not mean it is any smaller by market cap than a stock with a share price of $500. Stock splits in either direction can completely skew the price for a share of stock, but have little impact on the overall value of a business. Market cap is more important; it's simply the calculation of number of shares times the price of stock, the ultimate valuation of a company share by share.

What Stock Price Does Mean

Low priced stocks, those below $5.00 per share, are known as penny stocks and are usually stocks with low market caps and very little volume. These stocks are also volatile because each penny or tick on a chart is worth more by percentage than the same dollar movement in a high priced stock. Penny stock investing is more along the lines of speculation; they can be extremely profitable for some investors and traders, though do come with moer inherent risk because of the way small price movements mean a large percentage gain or loss.

High priced stocks, such as Berkshire Hathaway Class A shares, which trade for a value of greater than $100,000 per share, are generally kept so high to limit the number of investors. This is rewarding when critical votes come up for selections for the board of directors or when the CEOs would rather deal with a few thousand dedicated investors rather than hundreds of thousands across all geographic regions.