Question: Why are changes in a stocks price often given in percents instead of dollars? Doesn’t a person just really want to know how many dollars were gained or lost, instead of having to try to convert the % change into dollars? Thank you, Denny, Los Altos, CA
Answer: The reason is that percentages are a more efficient and information rich way to communicate the change in stock prices. For instance, a $1 increase in a stock price at the end of the trading day is significant if it’s a $10 stock or relatively meaningless if it’s a $100 stock. It’s easier to communicate the magnitude of market valuation change with percentages, 10% vs. 1%, respectively.
The same idea holds with the stock market. For instance, a 300 point drop on the Dow Jones industrial average from today’s level of approximately 11,572 sounds like a lot, but it’s a decline of some 2.6%. Yet when the Dow was at 6,000 in 1996 a 300 point decline translated into a plunge of 5%.
I would say the information in percentages is quicker to relay and grasp. For those who own the stock, well, they’ll figure out what the percentage move means in dollar and cents for them–good or bad.
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