The Dow was up 150 points. S&P increased by 30 points. These are the typical headlines we see when we go over stock market news. The media seems obsessed with these point increases and decreases, but do they provide the right perspective? If the Dow gains 150 points from 25000 to 25150 and S&P gains 30 points from 3000 to 3030, does that mean that the Dow Jones is performing better? Are these points really accurate indicators for measuring stock market performance?
What’s a Point in a Stock Market?
Points in a stock market describe gains or declines. They rise and fall several times during the course of a trading day. At the end of the day, they indicate whether the stock prices increased, decreased, or remained stable relative to their value at the beginning of the day.
A point can refer to either a stock index point or a stock share point. A stock index point is a whole number in the index value. When the Dow Jones index changes from 12,000 to 12,001, it has gained 1 point. This means that the collective value of all the stocks in the index has increased.
On the other hand, a stock share point indicates whole dollar price changes in individual stocks. If IBM is up 3 points, that means its share price is $3 higher.
These points merely provide us the direction of the market from a frame of reference. Beyond that, they don’t provide any other substantial information. For a better perspective on stock market performance, the percentage gain should be considered.
Percentage Gain vs. Total Point Gain
To better understand the difference between percentage gain and total point gain, let’s go over more concrete examples that illustrate hypothetical stock market scenarios. In both cases, consider a scenario with Company X and Company Y with current share prices of $25 and $100, respectively.
Company X gains 5 points and Company Y gains 10 points, increasing their share price to $30 and $110 respectively. Comparing their total point gains, it would seem that Company Y performed better.
However, using percentage gain would show that this isn’t an accurate evaluation. A gain of 5 points increased Company X’s share values by 20% while Company Y’s 10-point gain increased its share values by only 10%. Even with a lower point gain, Company X still performed better than Company Y.
What that means is that if you had the same amount invested in both Company X and Company Y, you would end up making more money on X vs. Y. In the example above, a $10,000 investment would make you $2000 on Company X and only $1000 on company Y in spite of Company Y having a bigger point gain.
Why Use Percentage Gain Instead of Total Point Gain On Stock Market Performance?
Clearly, percentage gain and total point gain provide us two ways of looking at how a stock or index has fared. In measuring stock market performance, using percentage gain instead of total point gain provides the more accurate picture.
Same points can have different values.
The significance of points depends on whether it refers to stock indexes or share prices and their current values. Gaining or losing the same number of points can mean very different percentages. This means that even if two indexes increase or decrease by the same number of points, they will register different percentage gains or losses. For instance, a 100-point jump in S&P 500 is a substantial increase. But the same 100-point increase in the Dow Jones is hardly significant.
Percentages can be used to determine the increase or decrease in value of your investments.
Points merely indicate the direction of the market. Percentages help you identify how much your investments are gaining or losing.
Percentages make comparisons easier to understand.
Using percentages to measure gains and losses enables you to compare investments of different sizes. A gain of $1,000 on a $10,000 investment is a huge deal. But this same amount is a paltry gain on a $1,000,000 investment.
Hence, using percentages to measure stock market performance allows you to see which among your investments are truly paying off.
Summary: Percentages Are A Better Gauge of Stock Market Performance Than Points
Points do indicate changes in the collective value of companies in the index and in the share value of individual stocks. However, the significance of drops and surges in points depends on the initial value of share price or stock index.
On the other hand, percentages makes it easy to understand and compare how significant the movement in the market is. Hence, percentages are still the better gauges of the stock market performance. We hope this answers why we use percentage gain to compare stock market performance by president and not points.