If you're new to investing, you might be a little confused by all the lingo that you have to learn. It can be intimidating when you feel like everyone around you is speaking in a new and different language. For example, lots of investors and financial analysts refer to stock price changes in the number of points lost or gained rather than talking about the price difference in dollars.
Points versus Dollars
Points are pretty easy to explain. One point is simply $1. That means that a 1-point stock increase equals a gain of $1 in the stock's value. If someone says, "That stock gained 20 points today," then you know they mean the stock increased its value by $20. Be careful, though, because the term "points" may have a different meaning in different financial situations. For example, if you are taking out a mortgage, you may have to pay "points" on that mortgage. Mortgage points are loan-origination fees and each mortgage point is equal to 1 percent of the loan amount.
Why Use Points?
You might be wondering why people would go through the trouble of converting dollars to points just so they can talk about stock-price changes. For many people, it's simply easier to use the term points than to speak about the dollar value of a particular stock. For most, however, referring to points instead of dollars is just a custom of the industry. There is no real difference other than that it is customary to refer to stock prices in this way.
Points v. Percentage
You should keep in mind that points are not the same as percentage increase. For example, if a stock gains 20 points in one day, that is far different from a stock making a 20 percent gain in one day. Points refer to the simple increase in value, but percentage increases or decreases refer to the stock's relative increases in value compared to the previous day's closing price. If you're analyzing a stock or investment, be careful to distinguish between point and percentage increases.
In addition to the distinction between points and dollars, there are a lot of other terms that you may run into when you begin investing. You should understand the meaning of terms like ROE and EPS. ROE stands for a stock's return on equity, while EPS refers to a stock's earnings per share. Be proactive about increasing your investing knowledge, because the more you know, the more wisely you will be able to invest your hard-earned cash. If you hear a term you don't know or can't understand, look it up.
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