1. Money

Explanation of How Percentages Describe Financial Market Price Movement

By

The price movement of financial markets (e.g. stock indices, individual stocks, currencies, commodities, etc.) is often described using percentages (e.g. fifty percent, 50%, etc.). For example, if the price of an individual stock market moves from $50 to $55 dollars, the stock market could be said to have moved upwards (i.e. increased) by ten percent.

While there is nothing wrong with describing financial market price movement using percentages, it can be useful to know that percentages do not necessarily describe the price movement equally, and that percentages can be biased to make it seem as though a financial market is increasing in value when it is not really doing so.

Percentage Basics

A percentage describes the value of a financial market (or an amount of anything for that matter) as an amount relative to the previous value of the financial market. For example, if an individual stock market has a value of $80, then one percent would be equal to $0.80 (calculated as 80 / 100 = 0.8), ten percent would be equal to $8 (calculated as (80 / 100) * 10 = 8 or as 80 / 10 = 8), and so on.

The Appearance of Percentages

If an individual stock market had a value of $80, and the price of the individual stock market moved upwards by $8, then the individual stock market would be said to have increased in value by ten percent. Similarly but conversely, if an individual stock market had a value of $80, and the price of the individual stock market moved downwards by $8, then the individual stock market would be said to have decreased in value by ten percent.

Given no further information (such as the individual stock market's previous price movement), it appears as though describing the individual stock market's price movement using percentages is exactly correct (which it is), and that describing the individual stock market's price movement using percentages is equally balanced between the value of the individual stock market increasing and the value of the individual stock market decreasing (which it isn't).

The Reality of percentages

If an individual stock market had an initial value of $80, and the price of the individual stock market moved upwards by $8, then the individual stock market would be said to have increased in value by ten percent (there is nothing different so far). However, if the price of the same individual stock market then moved downwards by $ $8 (back to its original value of $80), then the individual stock market would be said to have decreased in value by nine percent (one percent less than the previous increase of ten percent).

In other words, when the price of the individual stock market moved upwards by $8, the increase in value as a percentage was ten percent, but when the price of the individual stock market moved downwards by the same $8 (i.e. exactly the same monetary value), the decrease in value as a percentage was only nine percent.

The same difference applies to any monetary value, and becomes more pronounced as the monetary value (or the percentage) increases. For example, if a stock index had an initial value of $1,000, and the price of the stock index moved upwards to $2,000, then the stock index would be said to have increased by one hundred percent (100%), but if the price of the same stock index then moved downwards to $1,000 (i.e. back to the original price), then the stock index would be said to have decreased by only fifty percent (50%), even though the monetary amount (i.e. the $1,000) is exactly the same.

Using percentages to describe the price movment of a financial market is correct, but in doing so, it can appear as though financial markets move upwards more than they move downwards (particularly if the previous price movement of the financial market is not provided).

  1. About.com
  2. Money
  3. Day Trading
  4. Day Trading Basics
  5. Financial Markets and Percentages - How Percentages Describe Financial Market Price Movement

©2014 About.com. All rights reserved.