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What does it mean when the stock market drop points? Is it 1 point = $1 ? Never did quite understand the value of a "point".
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When a stock drops a point this is equal to a dollar for that stock, while when an index drops a point, eg the Dow, this may not be the case as divisors are used, which makes a point relatively meaningless.

JB
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What does it mean when the stock market drop points? Is it 1 point = $1 ? Never did quite understand the value of a "point".

This concept will probably be easier to understand if you know how they calculate the Dow and the Nasdaq.Here are some Foolish articles that explain how the Dow is calculated:

http://www.fool.com/DDow/1998/DDow980409.htm
http://www.fool.com/DDow/1999/DDow990318.htm
http://www.fool.com/DDow/1998/DDow980630.htm

Here's a non-Foolish site that will help you calculate the Nasdaq averages:
http://www.nasd.com/mr4a.html

Fool on!

Karen Kosoy
TMF Karen

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Thanks for the info. I'm pretty new at this. I usually just do mutual funds. I am studying for my Series 6 and 63 and will only sell mutural funds. I was asked the question about points and I didn't have a clue.

Another question: I think I know what a divisor is ... in general. Could you be more explicit re the stock market. And if its meaningless why is there so much importance placed on it? (Like people go nuts when the dow drops!)
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Sorry for the length in advance, but there are a few points that I think could take a little space to be made.
Here's a link to an article that may better explain how the divisor works.
http://www.fool.com/DDow/HistoryOfTheDow6.htm

Although, here are a couple of answers on how indices are computed:

(From http://averages.dowjones.com/faqs.html#6 )
How is the DJIA computed?
Originally, Charles H. Dow simply added up the prices of the stocks in his average and divided by the number of stocks. But over time the divisor has been changed to preserve historical continuity. The most frequent reason for such an adjustment is a stock split. Suppose a company in the DJIA issues one new share for each share outstanding. After this two-for-one "split," each share of stock is worth half what it was immediately before, other things being equal. But without an adjustment in the divisor, this split would produce a distortion in the industrial average. Here is an example: Assume three stocks selling at $5, $10 and $15. Their average price is $10. Now assume the $15 stock is split three-for-one, and the stock subsequently sells for $5. Nothing has happened to the value of an investment in these shares but the average of their prices now is $6.67, not $10. An adjustment must be made to compensate so that the "average" will remain at $10. This can be done various ways mathematically, but at Dow Jones it is handled by changing the divisor, or the number that is divided into the total of the stock prices. In this example, the new divisor would be 2 instead of 3. Most changes in the divisor are downward. The divisor fell below 1 in 1986, with a two-for-one split by Merck & Co. When you divide by a number less than 1, the effect is to multiply. Thus, with the divisor of 0.20435952 in effect on Nov. 1 of this year, a net increase in the aggregate prices of the 30 stocks of $10 would cause the DJIA to rise 48.93.

(From: http://www.spglobal.com/faqmain.html#calc )
How are the S&P Indices calculated?
The S&P Indices are calculated using a base-weighted aggregate methodology, meaning the level of the Index reflects the total market value of all component stocks relative to a particular base period. Total market value is determined by multiplying the price of its stock by the number of shares outstanding.

I said the value of a point is meaningless which is to say the scaling issue isn't that relevant, eg 1 point = ??? I have no idea and don't care, not unlike what does 1 dollar equal in non-monetary terms whereas there are examples for other things that you could measure and the density of water is 1 kg/L and could be viewed as a standard or 1 bit that is equal to one output digit,eg 0 or 1.

Now, when the Dow drops 10%(Which would be about 1,000 points now) this is important as some people have investments in the Dow companies and somehow they view declining stock prices as bad, which if you are holding and thinking of selling it may be. That 10% could be 1000 points, 1 million or 10 and it is all the same since it is the % change that means alot to me.

JB
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