What is a point in the stock market?
What is a point in the stock market? If you are wondering what it means, you have come to the right place. We will show you what it means in the many different contexts in which you will find it.
Read on and find out what it means when they say the stock market went up or down a point
If you are a beginner in the stock market, you have probably heard someone say that the market went up or down a certain number of points. Or even that a particular stock went up or down a certain number of points.
We are all mostly used to talking about prices going up or down. In everyday language, we will talk about this in terms of dollars, not points.
So when we hear the word points, it begs the question: what the heck does it mean?
Financial markets terminology is excellent in accomplishing two things. The first one is naming concepts so that you do not have to repeat the whole concept every time you talk about it.
The second is obscuring what people are talking about when someone new to the subject hears the terms. Some say this is a huge conspiracy to keep people ignorant of what goes on in the stock market.
But the reality is much more complex, and to think someone came up with the term “point” to hide something in the stock market is either a lack of or too much imagination.
In this article we are going to explain exactly what this word means in the different contexts in which it may appear in financial terminology. So let’s dive right into it.
So, what is a point in the stock market, then?
The word takes on different meanings in different asset classes. For stocks, for example, one point means the same as one dollar.
This means every time you hear that a stock has gained or lost a certain number of points, it means that it has lost that same number in dollars.
In more advanced financial instruments such as futures contracts, a point can mean more than a dollar.
This usually means you are using leverage, which is a more advanced concept that we will not cover in this article.
The market often uses points to describe price gains or declines in the short term. However, do not mistake points for percentages. They are not the same thing.
As an example, two different stocks can gain or lose the same number of points, but one’s points represent a bigger percentage than that of the other.
It is also important to point out that the stocks points system is different from the basic points used for bonds and currencies.
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The difference between points and percentages
Do not confuse points with basis points (bps) or percentages. When someone says a stock dropped a certain number of points, the share price determines how significant the drop is.
If a stock with a price of $20 dollars drops by 1 point, this represents a 5% drop in the price. On the other hand, a stock with a price of $5 that drops by 1 point suffers a much more significant drop of 20%.
When talking about indexes, bond prices, or currencies, points mean different figures. For example, in currency trading, one basis point is equal to a hundredth of a percent.
This means if the dollar drops 50 basis points, in percentages, it has dropped 0.5%. Let’s spend a little more time on the topic of indexes.
Points in indexes
Points are often employed to talk about short-term index moves. Indexes are composites that represent a weighted sum of the major stocks available at a certain exchange.
Investors use indexes to compare their investments to the overall performance of the market. Some examples of indexes are the Dow Jones Industrial Average, the S&P 500, and the Nasdaq.
Indexes deal with companies that are worth billions of dollars, so you can imagine speaking in precise dollar amounts would hugely complicate things.
So the points system serves as a simplified way to indicate changes in the stocks’ collective value.
This makes it possible to say that an index fell 100 points instead of $789,034,090.002. This makes things a lot more simple for investors.
Still, points do represent dollars in indexes. However, it is not on a 1-to-1 ratio. For simplicity, we are not getting into the specifics of how much a point is worth in this article.
That would require us to know how much the stock index is worth at this moment.
Should you think in terms of points or percentages?
If you do not manage money on a daily basis, most of the time, you think about money in terms of dollars. So at first, points may seem like the way to go because you are familiar with dollars.
However, even though you get a very clear picture of the amount of money you are making or losing on a particular stock, percentages provide more actionable data.
After all, 10% of $100 is less money than 10% of $1,000. If you have taken the time to think about your risk and how much of your money you can afford to lose, percentages will give you a much better measure of that.
Risk management is something that is often overlooked by new investors. That is why most of them will think about losses and gains in terms of dollars instead of percentages.
What can I consider a significant drop in an index?
We are going to use the Dow Jones Industrial Average (DJIA) as an example. On March 16, 2020, the flash crash caused by the outbreak of the COVID-19 pandemic made the DJIA drop by 2,997 points.
This was a very severe drop but represented only 12.9% of the index. The most severe drop ever registered in the DJIA happened on what became known as Black Monday.
On that day, the DJIA fell by only 508 points. However, this meant a 22.5% drop in a single day. That is almost 10% more than that of early 2020.
Yet another example of how percentages offer much more actionable data.
and now that you know what a point in the stock market is, you’re ready to read the next content and see if stocks will work for you as an investment. Read on and keep on improving your knowledge about finances.
About the author / Danilo Pereira
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