EXAM 3 FINAL EXAM Chapter 9 Outline Investment Info Securities TX Market average index Group of pre selected securities chosen for some shared characteristic Purpose Practical Uses Show the general market movement Forecasting seeing how an index has behaved in the past and forecast how the future will look there is no guarantee of future events Benchmarking the reference point How to use What do they measure the general behavior of stock prices over time Averages reflect the arithmetic average price behavior of a representative group of stocks at a given point in time Index s measure the current price behavior of a representative group of stocks in relation to a base value set at an earlier point in time They provide a convenient method of capturing the general mood of the market What don t they include How can you compare them Compare by percentage changes not by dollar amounts Equally weighted vs value weighted Equally weighted A type of weighting that gives the same weight or importance to each stock in a portfolio or index fund The smallest companies are given equal weight to the largest companies in an equal weight index fund or portfolio This allows all of the companies to be considered on an even playing field Value weighted A type of market index whose individual components are weighted according to their market capitalization so that larger components carry a larger percentage weighting Terminology Benchmark Is the reference point measures individual performance of stock to how the market average or market index performs The market average and index s give you a general idea of how the market is performing so you can see how your individual company is performing Ex are you tall or short depends on the reference point of what your height is being compared to If you are being compared to a child you will be tall if you are being compared to a basketball player you are short Divisor maintains a comparative relationship over time adjust for stock splits and changes in price in companies DJIA jones The Dow Jones Industrial Average is the oldest and most well known Was originally put together by editors of the Wall Street journal Charles Dow and Edward 1 It tracks the general behavior of high quality component firms o Occasionally a merger bankruptcy or extreme lack of activity causes a change in the makeup of the average o When a new stock is added the average is readjusted so that continues to behave in a manner consistent with the immediate past It is made up of 30 stocks selected for total market value and broad public ownership The DIJA is calculated each business day by substituting the closing share prices of each of the 30 stocks of the DIJA into the following equation o o The value of the DIJA is the sum of the closing share prices of the 30 stocks divided by the divisor Divisor adjusts for stock splits and changes in price in companies that have occurred over time Without this the DIJA value would be distorted Makes it possible for the DIJA to make time series comparisons o To find the DIJA closing value you take the sum of all 30 closing share prices and divide by the divisor o Higher priced stocks tend to affect the index more so than lower price stocks An equally waded average changes in higher priced components have greater impact on average only shows changes in PRICE Example stock 1 is priced 50 and increases by 10 that s a 5 point rise stock 2 is priced 200 and increases by 10 that s a 20 point rise Stock 2 has a greater impact it is a higher priced stock which has a higher impact on average as stated above Dow is used to compare past to present The DJIA actual value is only meaningful when compared to a previous value Multiple Dow Jones Averages Know that there are many averages and that you need to know the appropriate index o Dow Jones Industrial Average DJIA 30 stocks total market value companies chosen in the Dow are specifically chosen because they have large broad public ownership and are of high quality Give a broad overview of what is going on the US economy o DJ Transportation Average 20 stocks involved with trucking rail roads plains anything moving something from point a to point b Used as a leading indicator of things that are going to happen for example during Christmas time transportation may pick up due to people buying and sending more things showing that there is an increase in economic activity o DJ Utility Average 15 stocks act very differently because they are highly regulated o DJ composite average 30 20 15 S P 500 Standards Poor s First that selects index components Publishes 6 major common stock indexes The S P Index The S P 100 Index 2 The Industrials Index The S P 400 MidCap Index The S P 600 Index SmallCap Index The 1500 SuperComp Index Has 500 major firms S P 500 is broader than the DIJA S P has 500 companies DIJA has 30 Based on market values rather than share prices They are all US firms but they have global exposure Almost 50 of the production sales and profits of US firms come from overseas business This implies that there is tremendous interaction between the US and Companies outside and if you buy a financial product that holds the S P 500 you are globally invested at some level Amount paid in foreign tax is the amount paid in US tax Considers the market value of constituent firms Value weighted MV rather than just looking at the price the current price is multiplied by the of its shares so the size of the company is taken into consideration Closing market value of each stock closing price X the of shares outstanding The value of the S P is found by dividing the sum of the market values of all stocks included in the index by the market value of the stocks in the base period and then multiplying the result by the base value for the respective S P indexes Recall DIJA is equally weighted and does not consider the size of companies but only Like the DIJA S P indexes are meaningful only when compared to values in other time looks at its price periods or their base period value Although the DIJA and S P indexes tend to behave in a similar fashion over time their day to day magnitude and even direction can differ due to the differences in how the indexes are constructed Terms from Graph toilet paper Consumer Discretionary what you can cut back on don t have to have Consumer Staples things that would have a hard time cutting back on such as Materials aluminum chemicals metals and mining fertilizer and farming Telecommunication
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