If you ever read a financial newspaper, or watch financial news on television, you've seen stocks on the New York Stock Exchange listed by points. Points are the lifeblood of the New York Stock Exchange, as they represent the value of the stocks being traded. The point value of a stock on the exchange can change from day-to-day, or even from minute-to-minute. However, all point movements are not equal.
Points on the New York Stock Exchange translate to a dollar price per share for stocks. For example, if you see that IBM is trading at 100 points, that means the last trade in the stock occurred at $100 per share. Stocks rarely trade in exact whole numbers. It's more likely that a stock quote will be something along the lines of "100.23," with the decimal representing cents-per-share. If IBM trades at 100.23 points, it means the last trade in IBM stock was at $100.23 per share.
A one-point movement in a stock represents a $1 change, regardless of the stock. However, a one-point movement in one stock could represent a much greater percentage move than a one-point movement in another stock. For example, if you own IBM at $100 a share and it moves up two points, you've made 2 percent on your money. The same $2 movement in a $200 stock is only a 1 percent gain. Although you gain the same dollar value, the percentage growth of your money is less with the higher-value stock.
Dow Jones Industrial Average
The Dow Jones industrial average, also called the Dow, is one of the best-known stock market indexes. The index gets its value from the prices of 30 large stocks selected to represent a diversity of major industries in America. Points are important in the computation of this average, because the index is price-weighted. In a price-weighted index, stocks with higher point values have a greater influence on the value of the overall index. For example, a one-point move in a $100 Dow stock influences the value of the index much more than a one-point move in a $10 Dow stock, even though the percentage move in the lower-priced stock is significantly greater.
Stocks weren't always quoted in decimals as they are today. For the vast majority of the life of the New York Stock Exchange, stocks were quoted in whole numbers and fractions only. For example, before September 2000, a stock that today is valued at $25.25 would have been quoted as "25 1/4." The next price up would have been 25 3/8, equating to $25.375 today. The U.S. Securities and Exchange Commission ordered the switch to decimalization to reduce trading costs for investors and to make stock prices more understandable.
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