What Happens When the Stock Market Drops a Point?
All major financial television news sources track the major stock market indexes, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq. These results are widely followed by investors, some of whom also track them on their mobile phones. While keeping informed of overall market trends is important, keeping track of the hundreds of small price changes occurring in the indexes throughout the day may not give a long-term investor much useful information. A one-point drop in the Dow might not signify much.
Drops in Major Indexes
The Dow Jones Industrial Average is a weighted index of the current stock prices of 30 of the largest U.S. corporations. On Sep. 16, 2013, the Dow closed at 15494.76. A one-point drop from that closing price represents a decline in value of 0.0065 percent -- slightly over six-thousands of 1 percent. The same day, the S&P 500 closed at 1697.60, so a one point drop in that index is a decline in value of 0.059 percent, a little under six-hundredths of a percent. Even if changes in the indexes gave you vitally important information -- and not all financial writers think they do -- a one point change can't tell you much.
A Market Perspective
Neither drop has real significance for the stock market, either in terms of the overall percentages, which are very small fractions of 1 percent, or in terms of average market volatility. In the 10 days preceding the Sept. 16 close, the smallest daily change in value for the Dow was 6.6 points, the largest was 140 and the average for the 10-day period was 86.6 points. A one point drop represents only 1.15 percent of the average daily change in value.
Hypothetical Price Change
Another way of looking at a one point drop is to calculate the average change in the value of the 30 Dow stocks that will cause the drop. General Electric, one of the Dow components, closed on Sept. 16 at $24.14. If it had declined in value by 0.0065 percent -- the percentage change in the Dow of a one point drop -- GE would be worth $0.0157 less, a loss in value of about 1.5 cents.
Real World Price Changes
Calculating the hypothetical price change of a typical Dow stock when the Dow drops by a point doesn't really tell you much about what has happened to any one of the 30 Dow stocks. In the real world, a one point drop in the Dow doesn't cause anything; it's the result, not the cause, of various price changes in the 30 stocks that make up the index. A given stock price could have risen or fallen substantially. What the hypothetical change of one and one-half cents in GE's stock price does tell you is that a one point drop in the Dow is not a significant event.
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.