How To Understand Stock Market Points

The stock market has been a huge generator of wealth as well as a source of funding and liquidity for companies. As stock ownership becomes more widespread, particularly due to participation in retirement plans such as 401(k)s and IRAs, additional media sources cover the markets in more ways. The terminology can sometimes be confusing, but is often simple to understand with some background.

Instructions

1. Verify the type of stock market points you are viewing. There is a difference between points as they apply to individual stock and as they apply to stock market indexes.

2. Read points as dollars if you are talking about an individual stock. For example, if IBM stock is up 4 points, then it is up $4.

3. Interpret fractional points on individual stocks as percentages or fractions of a whole dollar. Historically, stocks did not trade in dollars and cents, but rather down to specifically dictated fractions such as 1/8, which is 1/8 of a dollar. Since stocks began to trade in cents instead of fractions, fractional points can also be equivalent to decimal points. For example, 4 1/2 points is equal to $4.50, and 4.50 points is also equal to $4.50.

4. Read points as "units of movement" when talking about changes in stock market indexes, NOT as dollar amounts. For example, a 50 point move (as in the Dow Jones Industrial Average was up 50 points today) does not represent an increase of $50 but rather an increase of units in the average. The value of a single unit fluctuates and is represented by the Dow Divisor.

Tips & Warnings

• The term "points" is widely used in investing and is defined differently depending upon its context. For example, with regard to bonds, a point represents 1/100 of a percent, while in real estate lending, a point is generally 1 percent.

Resources

• Read this Article in Spanish
• Dow Jones Indexes
• Standard and Poors Index Information