What is percent change?
Percent change is a simple concept that measures the increase or decrease in a value or quantity over time. It is expressed as a percentage of the original value.
For example, if the price of a stock increases from $40 to $50, the value increases by 25%. Similarly, if the price of a stock falls from $50 to $40, it drops 20%.
How percent change helps investors
At first glance, percent change may seem like a trivial concept. After all, why should investors care about the percentage increase or decrease in a stock's price when the rise and fall of dollar values really matters? The answer lies in the fact that per cent change provides a standardised way of comparing investments with different starting values.
Let's say you are looking at two stocks such as ASX banking giant Commonwealth Bank of Australia (ASX: CBA) and biotech company Telix Pharmaceuticals Ltd (ASX: TLX). You see Commbank trading at roughly $100 per share, while Telix's shares are priced at around $10. The dollar value of a CBA share is 10 times a Telix share, but does that mean it's a better investment?
Not necessarily. Share prices only reflect the total market value of a company divided by the number of shares in circulation. The Commonwealth Bank has issued roughly 1.6 billion shares and has a market capitalisation of around $175 billion. Telix's share count stops at 318 million stubs, with a market cap of $3.2 billion.
As measured by market value, CBA is about 55 times more valuable than the biotech stock. The basic stock price almost never says anything useful about the growth prospects or fair market value of any company.
Let's say that both Telix and Commbank's share prices increase by $1. That would be a big day for Telix, whose market value would increase by 10%. The same price gain would boost the value of your CBA holdings by just 1%.
Seen from the opposite side of the equation, a 10% price gain would lift Telix's stock from $10 to $11 per share. A 10% jump for CBA moves the stock price from $100 to $110.
In addition to providing a standardised way of comparing investments, percent change can also help you track the volatility of your portfolio. A stock with a high percent change over a short period is likely to be more volatile than one with a low percent change.
Moves measured in pure dollar values aren't very helpful for this purpose since a $10 change can be huge for one stock but just a rounding error for another.
The benefits of tracking percent change
How can you use percent changes to make better investment decisions? Here are a few tips:
- Look beyond the dollar value: When evaluating investments, don't just focus on the dollar value change. Consider the percent change as well to get a more accurate picture of the investment's performance.
- Track percent change over time: By tracking the percent change of your investments over time, you can better understand their volatility and risk.
- Use percent change to compare investments: When evaluating multiple investments, use per cent change as a standardised way of comparing them, regardless of their relative size and different share counts.
Keep an eye on the overall market: The percent change of individual stocks is affected by the market's overall performance.
By monitoring the per cent change of major indices, such as the S&P/ASX 200 Index (ASX: XJO), S&P 500 Index (SP: .INX) or Dow Jones Industrial Average Index (DJX: .DJI), you can gain a better understanding of the direction of the market and make more informed investment decisions.
Percent change case study
Let's look at a real-world example of per cent change in action. In 2020, the stock market experienced a significant downturn due to the COVID-19 pandemic. The S&P 500 index fell by 34% between the start of the drop on February 19 and the rock-bottom reading of March 23.
Although this may seem like a significant plunge, it was also a quick crash, and it's important to consider the per cent change over the longer term. From March 23 to December 31, 2020, the S&P 500 index increased by 68% as investors looked past the health crisis with effective vaccines on the horizon. All told, the S&P 500 gained 16% in 2020.
By looking at the percent change over the entire year, investors can see that the market actually recovered from the pandemic-induced downturn and ended up posting impressive gains.
In Australia, the ASX 200 followed a similar trajectory.
A short-term decrease in value may be concerning, but if the investment has a history of positive long-term performance, it may still be a sound investment. Keeping an eye on percentage changes in light of market-moving news can help you buy the dip or stay on the sidelines, as appropriate.
If you get used to looking at percent changes instead of dollar changes and put these price moves into the context of longer periods and the overall market's returns in the same time spans, you'll find it easier to monitor and evaluate your investments.
