You read the headlines on your phone or hear the announcement on the radio or TV: The Dow Jones Industrial Average gained 200 points by today’s closing, which elicits cheers from investors. Then there’s the opposite with the Dow falling that many points, eliciting fear and disappointment. What do these points mean when it comes to stock prices? There’s a difference between points regarding stock prices and points regarding those of a major exchange or index such as the Dow, which trades via the New York Stock Exchange, and the National Association of Securities Dealers Automated Quotations, better known as NASDAQ or the American Stock Exchange.
Stock Points Equal Dollars
When it comes to stock share prices, points and dollars are interchangeable. If a stock lost three points, it lost three dollars per share. If the stock gained three points, its share rose by three dollars. That’s where percentages also come in. If a stock rises four points from $8 to $12, it went up 33 percent. However, if a high-priced stock rises from $100 to $103, it has gained just 3 percent.
Stock Exchange and Index Points
Stock exchange points are not dollar for dollar. Instead, these points are weighted. Take the Dow, for example, which is the nation’s best-known index, consisting of 30 of the country’s largest corporations. It is the oldest such index, although a larger index such as the Standard & Poor 500 is probably more indicative of the overall market performance. For the Dow, a movement of one dollar in either direction of any of the 30 stocks equals a 6.42-point movement, either up or down. The actual value of the particular stock isn’t the issue, just the change in price. If the Dow moves from 24,000 to 24,500, it has increased 500 points. Indexes also use whole numbers rather than fractions. The Dow does not formally move 40.4 points in a day, just 40 points.
However, the S & P 500 index works differently and considers the market capitalization value of the country’s 500 largest corporations. The S & P 500 uses a proprietary index divisor to divide the sum of the adjusted market capitalization of all of its stocks and calculates its index. Financial professionals consider this a more accurate reflection of the market than the Dow.
Points vs. Basis Points
Points refer just to stock. Basis points, which are used in the bond and other markets, equal 1/100th of 1 percent of a bond’s value, so each basis point is 001. That sounds infinitesimal, and it is, but, as The Wall Street Journal explains, one bond trade may involve tens of millions of dollars, so those tiny increments add up. Basis points are also used in mutual and exchange-traded funds, generally in terms of fund expenses. If you want to know how much your mutual fund charges you annually in fees, the amount is expressed in basis points. Again, basis point differences are small, but if your money is in a fund charging 0.40 percent annually, you’ll pay a lot less over the long term than in a similar fund with similar returns charging five basis points more, or 0.45 percent.