CHAPTER 9 181 188 Investment Information and Securities Transactions I II Understanding Market Average and Indexes a Studying the behaviors of securities markets allows you to i Gauge general market conditions ii Compare your portfolio s performance to that of large diversified market iii Study market cycles trends and behaviors in order it forecast future market Stock Market Averages and Indexes a Stock market averages and indexes measure the general behavior of stock prices over portfolios behavior time i Averages reflect the arithmetic average price behavior of a representative group of stocks at a given point in time 1 Dow Jones Company prepares four averages a Dow Jones Industrial Average DJIA made up of 30 stocks selected for total market value and broad public ownership b The value of the DJIA is the sum of the closing share prices of the 30 stocks divided by the divisor i Divisor the purpose of it is to adjust for any stock splits company changes or other events that have occurred over time 1 Makes it possible to use the DJIA to make time series comparisons ii DJIA closing share price of stock 1 closing share price of stock 2 DJIA divisor c The actual value of the DJIA is meaningful only when compares to earlier values 2 Dow Jones Transportation Average based on 20 stocks including railroads airlines freight forwarders and mixed transportation companies 3 Dow Jones Utilities Average computed using 15 public utility stocks 4 Dow Jones 65 Stocks Composite Average made up of the 30 industrials the 20 transportations and the 15 utilities ii Indexes measure the current price behavior of a representative group of stocks in relation to a base value set at an earlier point in time 1 Dow Jones Company a DJ U S Total Stock Market Index is a market weighted index and measures the performance of all equity securities issued by U S companies that have readily available price data i Market weighted means that companies with large total market values have the most effect on the index s movement 2 Standard Poor s Corporation publishes six major common stock indexes a S P Index sum of current closing market value of stocks sum of base period closing market value of stocks 3 NYSE Amex and Nasdaq Indexes b Contain more shares than the Dow averages and all of them are based on market values rather than share prices so investors feel the S P provides a more broad based and representative measure of general market conditions c The 6 major common stock indexes published by Standard Poor s are i S P 500 index comprised of 500 large sized companies ii S P 100 index comprised of 100 large sized companies with individual stock options required for each constituent iii The industrial index made up of the common stock of 400 industrial firms iv S P 400 MidCap Index comprised of 400 medium sized companies companies v S P 600 SmallCap Index comprised of 600 small sized vi The 1500 SuperComp Index comprised of all stocks in the S P 500 400 MidCap and 600 SmallCap indexes a Each reflects the movement of the stocks listed on its exchange NYSE composite index includes about 2 100 stocks on b the Big Board i The most comprehensive of the Nasdaq indexes c d Amex composite index reflects the price of all shares trades on the NYSE Amex Exchange relative to a base of 550 Nasdaq stock market indexes reflect Nasdaq stock market activity a Publishes a number of stock indexes constructed by equally weighting the price of each stock included considering only the percentage changes in stock prices b This approach eliminates the effects of differing market price and total market value on the relative importance of each stock in the index c The Value Line composite index includes 1 700 stocks in the Value Line Investment Survey that are traded on the NYSE NYSE Amex and OTC markets 4 Value Line Indexes 5 Other Averages and Indexes a Frank Russell Company i Russell 1000 1000 largest companies ii Russell 2000 2000 small to medium iii Russell 3000 all 3000 companies in the 1000 and 200 iii Bond Market Indicators indexes 1 A Bond Market Data Bank includes a wealth of return and prices index data for various types of bonds and various domestic and foreign markets is published daily in the Wall Street Journal 2 Key measures of overall U S bond market behavior are bond yields and bond indexes a Bond yields the return an investor would receive on a bond if it were purchased and held to maturity i Reported as annual rates of return ii Are quoted for a group of bonds that are similar with respect to type and quality b Bond Indexes reflects the simple mathematical average of the closing prices for the bonds CHAPTER 8 153 169 Securities Markets and Transactions I Securities Markets a Securities markets forums that allow suppliers and demanders of securities to make financial transactions b Goal to permit transactions to be made quickly and at a fair price c Types of securities markets i Money markets where short term debt securities are bought and sold ii Capital markets where long term securities are bought and sold 1 Examples a Stocks b Bonds c Mutual funds d Exchange traded funds e Options f Futures II 2 Classified as either primary or secondary depending on whether securities are being sold initially to investors by the issuer or resold among investors The Primary Market the market in which new issues of securities are sold to investors a The issuer of the equity or debt security receives the proceeds from the sale b Initial Public Offering IPO the most significant transaction in the primary market which marks the first public sale of a company s stock and results in the company taking on a public status i Securities must first be registered and approved by the SEC which must confirm the adequacy and accuracy of the information provided to investors Seasoned equity issues the sale of additional stock by an already public company c d To sell its securities in the primary market firms can choose from the following 3 choices i Public offering firm offers its securities for sale to public investors ii Rights offering firm offers share to existing shareholders on a prorata basis iii Private placement the firm sells securities directly without SEC registration to select groups of private investors such as insurance companies investment management funds and pension funds e Steps on going public i Obtain approval from current private shareholders f Investment Banker s Role ii Company finds investment bank willing to underwrite
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