How to calculate percent change

More often that I would expect, I run across people who don't use percentages when looking at the charts.

Like a guy the other day on the Yahoo! Finance message board for FNM who was sneering something along the lines of, "Oh you idiots. This turkey isn't going to move by more than a penny."

Well, sometimes a penny is a lot.

It's not just noisy message board louts who fail to understand pecentage change.

When I worked as a reporter in the Associated Press Washington Bureau, covering the 1990 census, doing investigative journalism on the Clinton administration, managing the national election returns report, the most common question that I got had nothing to do with the population of Las Vegas, the vote in Florida or the extra-curricular activities of the president.

The question, asked in great puzzlement by some of the best journalists in the country, was this:

"What's the percent difference between these two numbers???"

For a private trader, calculating the percentage difference is the most basic of skills. I don't see how anyone can successfully operate in the markets without it.


So, for anyone interested, here is: The Ultimate Guide to Percentage Change.

Percentage change creates a level playing field for all stocks, whether it's GOOG, trading today at $562.80 a share, or FNM, trading at $1.05, and all price levels in between.

A 10¢ change in the price of GOOG, after all, counts for very little. In an FNM position, it can produce a significant gain or loss. There's far more than a dime's worth of difference between the two.

A price change in dollars and sense is just data. A percentage change is information. It has meaning.

Here's how the math is done:

Take the newer price, and subtract the older price from it. Then divide the result by the older price. To see the answer as a percentage, multiply by 100.

Simple as that.

On a spreadsheet, you might plug in this formula,

(New - Old) / Old

and then format the cell as a percentage.

Some real calculations: The percent change from yesterday's close.

GOOG:

• $562.80 - $562.45 = 35¢
• 35¢ / $562.45 = 0.00062
• 0.00062 * 100 = 0.062%

The 35&cent change is a bit more than six 100ths of a percent.

FNM:

• $1.05 - $1.06 = 1¢
• 1&cent / $1.06 = 0.0094
• 0.943 * 100 = 0.94%

A 1&cent change is nearly 1%.

In other words, the 1¢ change in the price of FNM is worth 15 times the 35¢ change in GOOG.

That's why, throughout this market letter, you'll see me using percentages in preference to price. I hope you'll consider doing the same.