When analyzing a stocks value, or more to the point change in price (to most investors, the most important number), there are two simple factors which come into consideration: the change in Points and the change in Percentage. Most reviews, ratings, recommendations, i.e. musings on the stock market, that I have see are singularly concerned with Percent, an easy to comprehend and very useful factor. However, viewing the market in this manner is intrinsically limiting in the stocks which can be considered. Including a measurement of change by Points provides a full, more diverse, view of the market, often overlooked by many investors.
For example: If you buy a stock at $50 and sell at $55 you have made a Percent gain of 10 and a Point gain of $5/share. The important concept/difference in using these two metrics is that one (Percent) is based on the dollars you have put in and the other (Points) is related to the number of shares. Fairly obvious, but the interesting devil is in the details.
If I am buying stocks in the conventional method of buying low and selling high as shown in the example the return is obvious. However, what happens if I were trying to take advantage of the change in price in the other direction ($55 to $50 or selling short)? Once again, based on Points, I made $5/share, BUT, by Percent I only made 9.1 .
Also, if I change my example a little and say the stock only increases in value to $51 when I sell I have only made 2 on my investment. For someone who only invested $4,000 to start the return is a disappointing $80 ($60 after you pay for the trade). This will keep me in lattés for the next week or so, but it is barley enough to make the risk worthwhile. However, if I were able to buy 5000 shares, well, I can get quite a lot at Starbucks for $5k.
Investing with the concept of Points as opposed to Percent is therefore useful if you have large amounts of money to put into a stock and/or if you are looking for profit in a declining market. These concepts define two types of investors: those mainly concerned with change (I don’t want to speak for you, but this is me); with reasonably small amounts of money they wish to profit from; and those concerned with Points, with big money making big investments (at least to me).
The major point which I want emphasize is that although the concept of investing by points is not as useful directly to smaller investors, it does help them to get their “head around” what the larger investors, who are often times in control of a given stocks price, are doing. Thus, it is a very useful tidbit of information to keep close at hand while watching a stock and trying to figure out what it is going to do next.
Conclusion: If you have smaller amounts of money to invest you will almost surely be looking for Percent gains. However, those with larger amounts, trading based on Points can become quite fruitful and allows the investor to take better advantage of the different changes which occur in the market.
Finally, If you are watching the market in bulk and defining stocks only by Percent change, you usually only see those stocks with smaller values changing by any significant amount. To include the higher priced stocks, and become acquainted with their volatility, you need to look at the changes from the perspective of Points. What becomes very interesting is the fertile ground of prices where these two often intersect (somewhere around the $50 range). Here the prudent investor, with this convergence of knowledge backing them up, can make decent gains.
Author Resource:-
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