When you turn on the financial news, you’ll likely hear phrases like “the Dow Jones Industrial Average gained 200 points today” or “the S&P 500 dropped 50 points in trading.” But what exactly are these points, and why do they matter to investors? Because one point is equivalent to a dollar change per share.
Obsession with stock market points began in the 1960s. Since then, it’s become a daily ritual, with media often using point changes to reflect the economy’s pulse. This can be misleading because other important indicators like unemployment, inflation, and housing starts are updated monthly. They offer a comprehensive, but less frequent, view of the economy.
Understanding point movements nonetheless helps interpret financial news and portfolio performance, but it’s important to consider both point and percentage changes for informed investment decisions.
Key Takeaways
- One point in the stock market equals one dollar for individual stocks.
- Stock market index points reflect changes in collective value, not dollar amounts.
- Different stocks with the same point change can have different percentage gains or losses.
- Percentage changes provide a clearer picture of market movements than point changes.
- Index weighting methods are crucial for understanding how stock market indexes are calculated.
Points in sports have a fixed value, but in the stock market, they can mean different dollar amounts depending on the index or stock. For individual stocks, one point equals one dollar. In stock indexes like the Dow or the S&P 500, points indicate changes in index value and may not directly reflect percentage or individual stock price changes.
Understanding stock market points is important for all investors, but it’s equally crucial to recognize their limitations as indicators of economic health or long-term portfolio value. Over the long haul, daily shifts are often as much noise as anything else. Whether you’re an experienced trader or new to investing, understanding stock market points can help you interpret market news, assess your portfolio, and make informed decisions while keeping a broad view of economic health.
Fast Fact
Be careful not to confuse points with percentages or basis points.
Understanding Stock Points and Their Impact
Understanding points in individual stocks is the foundation of market literacy. It’s the first step in translating market movements into real-world effects on your portfolio. For individual stocks, points are straightforward: one point equals one dollar. If you hear that Apple Inc.’s (AAPL) stock price increased by five points, that means the price went up by $5 per share.
Let’s say you own 100 shares of a company trading at $50 per share. If the stock rises two points to $52, your investment has increased in value by $200 (2 points x 100 shares = $200). This direct relationship between points and dollars makes it easy for investors to quickly calculate gains or losses on their stock holdings.
However, it’s important to remember that the significance of a point change can vary dramatically depending on the stock’s price. A one-point move in a $10 stock represents a 10% change, which is quite substantial. The same change in a $1,000 stock is just a 0.1% change—barely a blip, all things considered.
This is why investors often focus on percentage changes rather than point movements alone. A five-point increase in a $20 stock (25% gain) is far more significant than a five-point increase in a $500 stock (1% gain).
Some stocks, particularly those of younger or smaller companies, may trade for less than a dollar per share; they’re called penny stocks. In these cases, stock prices are often quoted in cents, and movements might be described in fractions of a point.
Important
The significance of a point change is magnified when dealing with stocks that trade at lower prices.
How Points Reflect Stock Market Index Changes
While points for individual stocks have a straightforward one-to-one relationship with dollars, points in stock market indexes are more complex. Each index calculates points differently, and it’s crucial for investors to understand these distinctions.
Decoding Points in the S&P 500 Index
The S&P 500 tracks 500 of the largest U.S. companies and is a market-capitalization-weighted index. This means larger companies have a greater impact on the index’s movements. For the S&P 500, the total points are the weighted market capitalization of all the S&P 500 stocks divided by the index divisor. This divisor, which is proprietary, is meant to keep the index level down to a manageable and reportable level.
Fast Fact
Market capitalization is the total market value of a company’s outstanding shares of stock, calculated by multiplying the stock price by the total number of shares.
As such, a 10-point move in the S&P 500 doesn’t directly correlate to a specific dollar amount for each stock in the index. Instead, it represents a collective change in value across all 500 companies. In any event, it’s best to read changes in the S&P 500 less by its individual point shifts than the percentage change for the period that interests you.
Interpreting Point Fluctuations in the Dow Jones
Owned by S&P Dow Jones Indices, the Dow Jones Industrial Average is a list or index of 30 companies to indicate the stock market’s overall strength. The Dow takes the average daily value of these companies to see if it has increased or decreased. This means higher-priced stocks have more influence on the index regardless of the company’s size.
The Dow’s point system is based on a divisor that’s adjusted for stock splits and changes in the index’s composition. This divisor ensures historical continuity, allowing for meaningful comparisons over time despite changes in the underlying stocks. This divisor was 16.67 in 1928; in 2024, it was 0.15172752595384.
Understanding Point Volatility in the Nasdaq Composite
The Nasdaq Composite, which includes over 3,000 stocks listed on the Nasdaq stock exchange, is also market-cap weighted like the S&P 500. However, it’s more influenced by the technology stocks that trade on the exchange, which can lead to more volatile point shifts over other indexes.
For all these indexes, it’s crucial to consider point movements in context. A 100-point move when an index is at 10,000 is much more significant (1%) than when it’s at 30,000 (0.33%). This is why many financial professionals prefer to discuss percentage changes rather than point moves alone.
What Are Point Changes in a Stock Index?
When the price of an index rises or falls by $1, it is called a “point.” Because an index is composed of many stocks held at various weights, a point move is a result of different stocks in the index rising and falling to varying degrees, but with the next effect being a $1 change in the index’s overall value.
Why Is Percentage Change Better Than Point Change?
Percentage change better reflects what is happening on an apples-to-apples basis. Say you have two stocks, one trading at $10 and one at $100. Given a one-point drop, the first falls by 10%, but the second by only 1%. Thus, the point move in the first stock is a much steeper and more severe drop. Because of this, when somebody talks about a stock index rising or falling by X points, they are often sure to frame it in percentage terms as well.
What Is the Largest Ever Point Drop and Gain in the Dow Jones Index?
The Dow Jones Industrial Average fell by 2,997 points on March 16, 2020, due to the COVID-19 pandemic. But just a few days later, on March 24, 2020, the Dow had its largest-ever point gain of 2,113. However, the largest percentage drop in the index was Oct. 19, 1987 (known as Black Monday), when the Dow fell more than 22.5% in a single day.
What Is Index Weighting?
Index weighting is the method used to determine how much each component stock influences the overall value of a stock market index. It’s essentially the recipe that decides how much each stock contributes to the final index.
In a price-weighted index, stocks with higher share prices have more influence, regardless of the company’s overall size. The Dow Jones Industrial Average is a well-known example of a price-weighted index. For market-capitalization weighting, a company’s weight in the index is proportional to its total market value (stock price multiplied by the number of outstanding shares). As a result, larger companies more significantly affect the index. The S&P 500 and Nasdaq Composite use this method.
Are There Advantages to Different Weighting Methods?
Yes, each has pros and cons, and different weighting methods can lead to very different results, especially in volatile markets. Market-cap weighting reflects the market value but can be dominated by a few large companies. Price weighting is simple but can be skewed by stock splits. Equal weighting gives more representation to smaller companies but may not reflect the market’s overall shifts as well.
The Bottom Line
Stock market points provide a quick measure of price changes, but their importance depends on the context. For individual stocks, one point equals one dollar, which simplifies calculations. However, for stock market indexes like the Dow, S&P 500, and Nasdaq Composite, points are more complex and can represent different dollar values based on each index’s unique calculation method.
Although points are a convenient shorthand, investors generally prefer considering percentage changes for context. They also consider point changes with regard to index weighting methods and see daily fluctuations as part of the larger economic picture.
For these and other reasons, while stock market points make for attention-grabbing headlines, they’re not always the most accurate indicator of overall economic health or long-term market trends. Investors should recognize the role of index weighting methods in understanding market moves and how these daily point shifts fit into the larger economic picture.