I’m embarrased not to know this, but when I hear the stock market is down 500 points, I always wonder points of what? There seems to be a rough relationship between points and percentage of sales, a 500 point decline seems to be roughly a 44% decrease in sales. I’d appreciate it if someone could enlighten me.
(Just a rough answer, as I’m sure someone will be along shortly who’s better informed.)
It refers to gradients of an “index”, in this case specifically the Dow Jones Industrial Average. The index, in turn, is roughly a weighted average of thirty important individual US stocks. The actual numbers of the index reflect changes in these stocks’ collective value from some arbitrary date in arbitrary increments called “points”.
ETA: I think you could describe it as a kind of shorthand for answering the question, “how did the thirty most important stocks perform today?” You could either run through the list ("Well, Alcoa was up three dollars, and Coca Cola was down ten, and Exxon Mobile was up fifty . . . ") or use the artificial “points” to give you a quick snapshot of the whole group.
ETA ETA: Nothing to do with sales (as the index is defined), just movements in stock prices.
Thanks for the quick reply. It was one of those things that I should have known, but never learned.
I’m not sure what you mean by “500 points seems to be roughly a 44% decrease in sales”. Sales of what? Do you mean stock activity?
The Dow Jones is (or was) around the 11,000 mark, so a drop of 500 points equates to a little under 5%, in terms of “market value”. It just means that on average, the shares in the index are worth 5% less than they were.
The DJIA as mentioned is an aggregate value of thirty blue-chip stocks. Points for individual stocks are equivalent to dollars (i.e. 100 shares of Acme, Inc. at 10 points will cost you $1000 plus brokerage fees) and I believe that Dow points are the same. Stock prices are listed in increments of 1/16 of a dollar on the NYSE. I believe the NASDAQ does it in pennies. Also, a loss of 4.4% is not a loss of sales, but a loss of value.
FWIW,
Rob
You mean like purchasing through an index fund?
All stocks are now traded in dollars and cents, the 1/16 pricing was eliminated years ago. Penny stocks can be traded out to 4 decimal points, such as .0002 x .0004
Not quite. To calculate the DJIA, you first add the price per share of each of the 30 components. Then you divide by a particular number called, logicaly enough, the divisor. Currently the divisor is about 0.123, so if every one of the Dow 30 has their share price rise by two dollars today, the DJIA would rise nearly 500 points (2*30/0.123=487.8).
The divisor changes quite frequently: every time one of the component companies pays a dividend, when their stocks split, when they spin off a subsidiary, or when one company is replaced in the Dow 30 by another (and in certain other unusual circumstances). They have to adjust the divisor to keep the index a fair gauge of value. For example, after a stock splits 2-for-1, shareholders have twice as many shares, each of which is worth just about half as much, with the total value being nearly unchanged. To give an extreme example, if all 30 components split on the same day, the DJIA would fall by half unless the divisor were adjusted to reflect the fact that there are twice as many shares.