Chapter 9 Outline Investment Info Securities Tx Market average index o Group of pre selected securities chosen for some shared characteristic o Purpose Help people select and time investment actions Gauge general market conditions movement Compare individual portfolio performance to that of a large diversified market portfolio benchmark Study market cycles trends behaviors in order to forecast future behavior based on past o How to use Choose the appropriate index Ex measuring performance of the stock of a certain computer company you re interested in against an index containing computer companies Ex choosing stock in a random company that seems promising compare to index of entire market Must use exactly the same time frame when comparing Compare changes instead of dollar amounts shows relationship relative to the size of the average o What do they measure General behavior of stock prices over time Change is relative to the closing prices of previous day Strength weakness of market o What don t they include All companies securities on the market Standard way to reference against each other ie one average against another not comparable o How can you compare them Average Reflect the arithmetic average price behavior of a representative group of stocks at a given point in time Only depends on stock price Index Measure the current price behavior of a representative group of stocks in relation to a base value set at an earlier point in time Depends on both stock price AND the size of the company o Equally weighted vs value weighted Equally weighted Solely depends on closing price Percentage changes in higher priced components have the most impact on the organization Applies to averages Value weighted 1 Closing price X the number of shares Applies to indexes Size of company is taken into consideration o Terminology Benchmark Divisor Reference point to make comparisons to Adjusts for any stock splits company changes or other events that have occurred over time Maintains comparative relationship for averages over time DJIA Dow Jones Industrial Average o Most popular widely cited average o Based on prices of shares o Made up of 30 high quality reflective stocks o Represents total market value broad public ownership o Equally weighted higher priced stocks have greater effect o Numbers are only meaningful when compared to previous DJIA values o Formula Sum of closing prices for all 30 shares DJIA divisor S P 500 o Based on market values o Made up of 500 large sized US companies more than DJIA o Broad based representative more so than DJIA o Global exposure o Value weighted size of companies taken into consideration o Numbers are only meaningful when compared to previous S P 500 values o Formula Sum of current closing market values for all 30 shares Sum of base period closing market values for all 30 shares x 10 Nasdaq Composite 3000 stk o Made up of 3 000 both US international firms o High concentration of technical and growth firms o Measures the stock index on the NASDAQ exchange o Uses over 4 000 domestic common stocks o Based on value of 100 set at Feb 5 1971 General Continually priced Closing price o o Constantly changing prices The price that the last trade at the end of the day is made at 2 Price measure relative to what The price the day before Mixed market direction The market the same direction Stock movement o o o o o Stockbrokers When the DJIA S P 500 and NASDAQ are not all moving in the same Generally refers to either the DJIA or the S P 500 or both mostly move in Most assets move in the same directions but by different amounts Firm sensitivity to the market Varies individual for each firm o Also known as account executives investment executives financial consultants o Act as intermediaries between buyers sellers of securities o Main goal buy sell at best possible price o Investor Stockbroker Brokerage firm Exchange market maker OR Alternate trading system chain that order is passed along confirmation is passed along same chain but backwards after the exchange has taken place o Commissions Fees they charge to facilitate transactions Stockbrokers make money every time you buy or sell even if you lose money The more you trade the less likely you are to beat the market profit due to all the commission charges o Licenses place orders o Types of Brokers Must be licensed by both the SEC the securities exchanges on which they Full service offer many services can give the most advice Premium discount focus mostly on transactions little advice Basic discount focus solely on transactions no advice Order types o Market Most common What is does immediately Why would it be placed Executes order to buy sell stock at best price available Immediate transaction fastest type of order Certain order execution once you press the button to confirm you know the order is being executed Risk 3 Price uncertainty possible rapid change in price o Limit order Good type of order to make when the price of stock is fluctuating a lot Entered into books and then executed by precedence market orders first then orders go chronologically when they are able to be satisfied Executes order to buy sell stock if AND only if the stock rises or falls What it does to a stated price Why would it be placed o Stop order a k a stop loss order Risk Gets the investor the best price within trading range Waits to purchase sell stock until price is where investor wants it Investor gets to set prices willing to pay no uncertainty Investor doesn t have to be present for exchange to take place No execution certainty Must wait for execution behind all orders with more precedence ie all market orders If price moves in opposite direction than investor wants they could miss out on a chance at income When the price of the stock approaches gets close to investor s desired price but doesn t hit it exactly investor misses out Sleeping Beauty must be woken up to activate turn it into a market order suspended market order What it does Broker tells market maker to sell a stock when its market price reaches drops below a certain level stop price When stop price is reached order is activated and treated as a market order therefore executed at the best available price immediately Optional investor can set a stop limit a minimum price at which they think it is acceptable to sell their stock Why would it be placed Limits investor s losses if the market moves against them Protects against effects of rapid decline in share prices Only activated IF
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