Points on the Dow
Question: I dabble a bit in the stock market with the money that have left over. That said I have a question in regards to how the ups and downs are reported. The Dow is up 50 points etc.... Why points? What does that mean? Percentages I understand. Points? Not so much. Can you help me better understand this? Thanks. Sincerely, Karen, Chester, VT
Answer: How now, Dow? It's the world's most famous market index. Charles H. Dow unveiled the 12-stock Dow Jones industrial average industrial in 1896. He created it as a guide for investors to see how the market was doing. Before the index, it was much harder to answer the question, "how is the market doing?" The market was just a bunch of stocks, some going up and others down, with no readily identifiable benchmark. The Dow is a measuring rod to judge the market's direction and making comparisons. The DJIA is made up of 30 giant brand-name companies, including 3M, Microsoft, Exxon, and General Electric. (GE is the only surviving company in the index from the original 12.) It's calculated every 2 seconds while during trading hours.
You would think the answer would be easy. It was simple once. When Charles Dow started the index all he had to do is add the prices of the twelve stocks and divide that figure by 12. But over the years the component companies in the index have changed, it has swelled to 30 companies, there have been stock splits and major stock dividend payouts. So, the first part of the Dow equation remains the same: Total the prices of all the stock from the 30 companies. What is different is that a Dow divisor has been created to preserve the index' historic continuity. Dow Jones lays out the reasoning in more detail here.
Currently, a $1 change in any Dow stock moves the average by about 7.56 points. But the easiest way to think about changes in the DJIA is with overall percentage changes. While I am writing this the Dow is at 10,824. Let's say it goes up 200 points to 11,024. That's a gain of 1.8%. I'd stick with percentage changes in the index.