Percent change is a calculation that is used to quantify how much a value changes, often measured over time. This measure is common in financial markets to describe the change in asset value, such as stock prices.
Percent change is not limited to quantifying change in financial markets. This measure can describe changes in temperature, speed, or even bodyweight. This measure is often qualified as being either a percent increase or a percent decrease — the latter indicating a negative change.
Calculating Percent Change
Percent change is a simple mathematical calculation that describes the proportional differences between two numbers. This calculation is done in three distinct steps:
- Subtract the initial value from the final value — difference;
- Divide the difference by the initial value — fractional change;
- Multiply the decimal percent by 100 — percent change;
This calculation can be represented visually as the following formula:
Example of Percent Change
As an example, let us consider a percent difference calculation of a fictitious stock price — XYZ. This stock has an initial price of $3.50 and over an undefined period of time reaches a share price of $5.65. The percentage change (percent increase in this case) can be calculated by the following steps:
- 5.65 – 3.50 = 2.15 (total change)
- 2.15 / 3.50 = .061428 (fractional change)
- .061428 * 100 = 61.43% (percent change)
Step two describes how much the stock changes relative to its initial starting price. The third step puts it into a common contextual range of 0-100. This calculation is broken down in the image below:
Percent Increase vs. Percent Decrease
The terms percent increase and percent decrease are more specific qualifications of percent change. In the XYZ stock price example above, our final value was a positive number indicating an increase in value. However, if the stock price had dropped below $3.50, we would have calculated a negative number — a.k.a. a percent decrease.
Absolute vs. Relative Change
Percentage change measures the change of a single value during a period of observation. This measure can be applied in ways that are misleading. For example, let’s say stock XYZ’s price increased from $3.50 to $3.51 one month, and then from $3.51 to $3.55 the next month. This change could be described in one of two ways:
- The Absolute change
- The Relative Change
The absolute change in price is $0.04 (four cents) and the relative change using the same method as before, is:
((3.55 - 3.50) / 3.51 * 100) = 1.42%
In either case, this seems to be a lowly change and a fairly boring figure. However, one could also describe the change in month two relative to the change in month one. In such a case, the relative change could be calculated as follows:
(3.55 - 3.51) - (3.51 - 3.50) / (3.51 - 3.50) * 100 = 400%
In this case, we can say that there was a relative increase of 400% in the price of XYZ stock in month 2 vs. month 1. In this way, percent change can be used to exaggerate or marginalize changes.
Percent Change is a useful calculation by which one can easily understand how a value changes over time. It can be used to describe both increases and decreases in value as well as to describe relative and absolute changes. It’s important to always pay attention to the context in which such figures are presented as they often can be interpreted in a misleading capacity.