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Concepts & Tutorials

Points vs. Percentages

Points and Percentages
Every day one hears about how the market is going up 400 points, or down 100 points. TV anchors and analysts express a lot of surprise that the market is moving faster and faster in terms of points! This rediff article says:

From 7,000-mark, the sentiment turned distinctly firm following good liquidity that played a significant role to determine the market direction and Sensex crossed 8,000-mark in just 55 trading sessions at 8,060.26 on September 8, 2005 and 54 trading days to cross 9,000-mark at 9,005.63 on November 28, 2005.

From 9K to 10K, it took just 48 trading sessions. The index crossed 10,000-mark on February 6, 2006 at 10,002.83.

From 10K to 11K, it only took 29 trading sessions.

This is the kind of sentiment that makes people think: WOW! And when it drops 400 points in one day, everyone is unhappy and calls it a scam and all that.

This is absolutely ridiculous. What’s the point of noting that there is more volatility in the market in terms of points now? Everyone needs to understand this: The stock market is all about percentages. Not about points. All movements are in percentages, not stock values.

Let me give you an example. Let’s say Sunil invests Rs. 10,000 and gets a profit of Rs. 1,000, and Rajeev invests Rs. 50,000 and gets the same, Rs. 1,000 profit.

They both earn the same amount, but Sunil’s gain is 10% while Rajeev’s is 2%. Meaning, Sunil’s gains are superior; if Rajeev had invested in the same way as Sunil, he would have earned Rs. 5,000!

Similarly, all gains in the stock market are valued by percentages, not by values, or points. That means a stock like Reliance moving from Rs.1,000 to Rs.1,100 is less valuable (to an investor) than Bata moving from Rs. 240 to Rs. 310.

So a sensex will move faster between 11,000 and 12,000 than it did between 7,000 and 8,000. Obviously, since the percentages movement is only 9% in the former and 14% in the latter! And more importantly, a fall of 100 points is only 1% (today). That is very normal – when the Sensex was 6,000 we would see a 60 point rise or dip daily, and that is also 1%.

Concentrate on percentages, not on absolute numbers. All gains and losses are percentages, nothing more.