Points reveal the direction in which a single stock or the market as a whole is currently moving. Points often rise and fall many times over the course of a trading day, and when the day is over they indicate whether stock prices are up, down or stable in relation to their position at the start of the day. Understanding what a point means on the stock exchange is important not only for the information it imparts daily but also for what points indicate over time.
Single Point Definition
Consider a point from the perspective of a single share of common stock, a single point and an individual investor. Here, a single point is the equivalent of $1. If a stock currently trading at $50 per share rises to $55 per share or falls to $45 per share, the rise or fall equates to five points. This information helps you monitor the performance of stocks you already own and is useful for evaluating a stock you may be thinking about purchasing.
Stock market indexes such as the Dow Jones Industrial Average expand on a simple definition of a point. Although a point still equates to a dollar, the Dow assigns a "weight" – or level of importance – to each of the 30 stocks it includes and calculates an average rise or fall according to the weight it assigns to each. Because of this, the one to two point move of a heavily weighted component stock can change the average by any number of points. Price-weighted averaging takes place multiple time over the course of a trading day and allows you to analyze basic market trends and the performance of the stock market as a whole, and it helps you make predictions about where the market is heading.
Calculating the Dow
Calculating the Dow starts by adding up the current trading prices of 30 of the biggest industrial-sector U.S. companies. As of publication date, this list includes companies in a variety of industries, such as Boeing, General Electric, McDonald’s and Wal-Mart. After calculating the sum, the Dow divides it by a "Dow divisor" that changes over time – for example, in 2008 the divisor was 0.125552709, and as of May 2013 it stands at 0.130216081 -- to take events such as stock splits or mergers into consideration, maintain consistency and allow past-to-present price comparisons.
Near constant calculations over the course of a trading day show how the market is currently performing. If the Dow falls 200 points from its last calculation and closes the day at this point, the performance of individual stocks may be satisfactory, but the market as a whole is currently performing poorly. If over time the Dow continues to fall, poor overall stock performance may indicate the market is trending toward a “bearish” market, one characterized by overall falling stock prices and increased risk for investors.
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