What Makes Stock Market Points Go Up or Down?

Stock market indexes change based on the changing prices of certain groups of stocks.

Stock markets are based on change. Investors make money by speculating on these changes, choosing to buy and sell at specific times. These investors need easy ways to track overall market performance and to gauge how quickly the market is moving day by day. Indexes give investors this information through their point values and the magnitude and the pace of their rises and declines.

Stock Markets

The stock market is where company stock is traded. This should not be confused with debt markets, where bonds, notes and other types of debt are traded. The stock market is concerned only with ownership in the company. Each share's success depends on the worth and growth of the company to which it belongs. Stocks are constantly rising and falling in price.

Indexes

Indexes attempt to show the changes in the stock market. Three popular indexes tracked in the United States are the Nasdaq Composite, the Dow Jones Industrial Average and Standard and Poor's 500. The Dow Jones, technically an average, is used most often, and when people talk about the stock market losing or gaining, they are usually talking about the Dow. The Dow is composed of 30 large companies whose stock values are translated into an average that represents the state of the market.

Basic Stock Movement

On the surface, the Dow is fairly simple. When the stock market loses value--when many investors are no longer willing to pay high prices for stock and the value of shares falls--the repercussions are felt throughout most stocks, including the 30 that make up the Dow. Some of these 30 fall in dollar value, and the Dow formula takes the values of all 30 companies, adds them together, and averages them to find a point amount. The lower the value falls, the lower the average--and the higher the share values climb, the higher the average.

Dow Divisor

Companies often split stock and give out stock dividends, which create problems with the simple Dow average. A stock split will reduce stock value, but is usually a sign of company success. To deal with these problems, a Dow Divisor is used, a constantly modified number that takes into account extraneous actions by the 30 Dow companies. This number is multiplied into the Dow average to increase accuracy.

Difficulties

As accurate as the Dow may be, it does not take into account value changes in different companies--it does not weight one change more than another, even those in which a $1 increase in five $10 share companies is much more significant than a $1 increase in five $100 share companies. This is where other indexes and analysis play a large part in giving investors more complete information.

References

• Investopedia: How Now, Dow? What Moves the DJIA?
• Dojitrading: The Mind of the Stock Market: Why Do Stock Prices Go Up?
• Nasdaq: Glossary