What Does a Point on the Stock Exchange Mean?

You will manage your investments better by understandng the meaning of stock exchange points.

You will manage your investments better by understandng the meaning of stock exchange points.

On Black Monday, Oct.19, 1987, the Dow Jones industrial average dropped a precipitous 508 points, representing an historic $500 billion loss in one day. Most observers agree that Black Monday was a terrible day for stock investors, but many people are curious about what 508 points on the stock exchange actually means. The short definition, for a single stock, is that one stock point equals one dollar, but that doesn't translate directly to stock exchange indexes.

Stocks by the Point

Assume you bought two stocks, one for $10 and one for $20. If your $10 stock increased in value by $3 to $13 the following day, you would say that you gained 3 points on the stock. If your $20 stock increased $5 to $25, you would say the stock gained 5 points. Point gains are not the same as percentage gains. Your $10 stock had a 30-percent-gain—$3 divided by $10—while your $20 stock had a 25-percent gain.

Stock Market Indexes by the Point

Although the "one point equals one dollar" concept works well for individual stocks, one point of the Dow Jones industrial average does not equate to one dollar. This is a price-weighted index of the combined performance of 30 stocks of the largest companies in the U.S. Although the Dow Jones industrial average includes the word "average" in its name, it is actually an "index" because the 30 stocks are "weighted" by price. Some stocks are more important than others. You compute the Dow as follows: add the component prices of the 30 stocks to get a total, and then divide the sum of the 30 stock prices by the "Dow divisor." The Dow divisor provides the indexing function. It adjusts the total price of the combined 30 stocks based on the relative importance of each individual stock. The divisor is periodically adjusted to account for important changes in the values of component stocks. For example, the Dow divisor was adjusted to 0.132129493 in July of 2010. This adjustment reflected the divestment of New Communications Holdings by Verizon Communications.

Other Stock Market Indexes

The Dow Jones industrial average is not the only stock market index. Other familiar indexes include the Standard & Poors 500 Index, the Russell 2000 Index, and the Wilshire 5000. The numerical value of each index quantifies the number of component stocks in each index. They're called indexes instead of averages because they make mathematical adjustments in their component stock prices to compute the index numbers. Because all of the indexes use proprietary adjustments, you can't make apples-to-apples comparisons. The indexes tend to move in the same direction over the long term, but not necessarily during the short term because each index communicates different information.

Bonds by the Point

Bond markets are as fond of using the term "point" as stock markets, but bond points should not be confused with stock points. Bond points are usually discussed in terms of basis points. Each bond basis point equals 1/100 of 1 percent of the bond's value -- .001.

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