It's become very common to hear that, in a single day of trading, the Dow Jones Industrial Average has risen or fallen at least 500 points. That may seem like a lot — and it is — but without context, a move like that doesn't mean much to most people.
The Dow is one of the primary benchmarks for the U.S. stock market, and it tracks the prices of 30 stocks of blue-chip companies in various industries. As an index, or a collection of individual stocks, its level is calculated constantly throughout the trading day based on the prices of those stocks.
When the Dow rises or falls, the movements often are cited in terms of the change in points. That's a tradition that dates back to the early days of this index in the 1890s. Today, the direction and magnitude of those points changes offers some indication about how traders are feeling about the prospect for U.S. stocks in the short term.
Learning how to read stock tickers can help boost your overall understanding of how the market works. And understanding why the Dow's movements are quoted in points can also deepen your knowledge of the market.
The Dow is price-weighted, meaning that the value of this index is calculated based on the prices of its 30 members. That's one of the key differences between the Dow and the S&P 500, which is calculated based on the market capitalization of its 500 members.
So far in 2020, the Dow has been valued in the range of about 18,500 to 29,500. These levels are dictated by the price changes for the individual members. Companies with higher stock prices have a bigger effect on the Dow's movements. As of March 2020, the two highest-priced stocks in the Dow are Apple and UnitedHealth Group.
Video by David Fang
But the Dow's value isn't a dollar amount, even if that's how some people refer to it. Its value as an index is calculated by adding up all the prices of the 30 component stocks and then dividing that sum by a special number known as the Dow divisor. Currently, the divisor is about 0.15. That results in an index amount that is several times larger than the dollar value of those 30 stocks combined.
Based on the current value of that Dow divisor, if this gauge drops 500 points, that means the aggregate prices of the 30 components went down about $76.
Unless you follow the market on a daily basis, knowing the point-change for the Dow may not be very helpful. That's because a 500-point movement doesn't exactly translate to a dollar amount, and it means much less today than it did even five years ago.
Suppose the Dow's value is approximately 20,000. A 500-point move is equivalent to a shift of about 2.5%. However, if the Dow's level is only 15,000, as it was about five years ago, that same move is a more significant shift of 3.3%. Back in 1987 when the Dow fell about 500 points in one day, that was the equivalent of it losing about 23% of its value.
Video by David Fang
Because stock markets have trended upward over time, the value of the Dow has also gone up — and that means the point movements now may be bigger, though the percentage change isn't. The fluctuations in the stock market recently due to Wall Street's fears about the health and economic toll of the coronavirus outbreak has highlighted this dynamic.
On March 16, for example, this gauge plummeted nearly 3,000 points for its worst single-day point decline in history. On a percentage-change basis, though, that day's declines came in third, behind market crashes in 1929 and 1987.
Similarly, the Dow surged more than 2,100 points on March 24, for its biggest day ever of gains. However, when considering this as a percentage move, that 11.4% ranked fifth, behind daily gains in the 1929-1933 period.
Tracking the swings in the stock market can help you to understand what type of news affects stock prices. However, experts caution that long-term investors don't need to obsess about these daily moves, whether up or down.
Instead, it's more important to focus on the long-term merits of investing. Focus on three basic rules of investing: Diversify your portfolio to include a mix of different assets, dollar-cost average to spread out your purchase price over time, and rebalance to ensure your portfolio aligns with your risk tolerance.
Finally, remember that no matter what happens in a single day, the stock market has trended upward over a period of years and decades.
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