Drill-Bit Stock

Drill-bit stock is a term used to describe stock shares that trade for prices less than one dollar. They are called drill-bit stocks because the prices are listed in fractions, like the sizing of drill bits in the hardware store.

Drill-bit stock prices are reported as fractions of a dollar, while hardware drill bit sizes are described as fractions of an inch.

Drill-bit fractional stock prices are no longer used and stock prices are instead expressed in decimals. The regulatory body of securities trading in the United States, the Securities and Exchange Commission (SEC) decided that all securities exchanges nationwide should convert to decimal pricing by April 9, 2001. Since then, all prices have been listed in decimal format. Before 2001, the majority of the exchanges and stock markets in the United States traded in fractions, but the SEC wanted American exchanges to conform to standard international pricing and trading practices, and for investors, most of whom were able to interpret and calculate using decimals more quickly than they did using fractions, to trade quickly and efficiently using decimal price quotes.

The switch from drill-bit-style fractional pricing to decimal pricing has led to tighter spreads because decimals enable narrower price increments and smaller movements. Before the switch to decimals, the smallest price movement that could happen was one-sixteenth of a dollar, or $0.0625. Since decimals have been in effect, the smallest movement possible is one cent. This gives much more subtle movement at times, with tighter spreads between buy and sell prices than were possible before.

There are many reasons that a drill-bit stock could have such a low per-share price, everything from being a recent initial public offering (IPO) to being a company that has been significantly devalued and is in the process of being delisted from an exchange or going bankrupt. Most of the situations that lead to stock prices being under a dollar per share indicate instability, so buyers should proceed with caution with drill-bit stocks.

Drill-bit stocks are usually considered highly speculative as well as high risk. This is because of their lack of liquidity because other buyers are wary of them. They also tend to have large bid-ask spreads and small capitalization, which means they can be difficult to buy or sell and they don't have market makers supporting them. While they may work for investors with a high tolerance for risk that can capitalize on their volatility, they are not recommended for individual investors who are looking for guaranteed returns.