FIN 3244 Test 3 Review Chapter 9 Investment Information and Securities Transactions Market Averages and Indexes o Market Averages reflect the arithmetic average price behavior of a representative group of stocks at a given point in time o Market 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 o From PowerPoint A group of pre selected securities usually chosen for some shared characteristics Practical Uses Dow Jones Averages o Observe general market movement These measures allow you to conveniently 1 gauge general market conditions 2 compare your portfolio s performance to that of a large diversified market portfolio 3 study market cycles trends and behaviors in order to forecast the future market behavior o From PowerPoint Tracks general behavior of component firms o Dow Jones Industrial Averages DJIA made up of 30 stocks selected for total market value and broad public ownership The group consists of high quality stocks whose behaviors are believed to reflect overall market activity o Divisor The value of the DJIA is merely the sum of the closing share prices of the 30 stocks including in it divided by a divisor The purpose of the divisor is to adjust for any stock splits company changes or other events that have occurred over time The divisor makes it possible to use the DJIA to make time series comparisons o Multiple Dow Jones Averages Dow Jones Transportation Average 20 stocks including railroads airlines freight forwarders and mixed transportation companies Dow Jones Utilities Average Computed using 15 public utility stocks Dow Jones 65 stocks Average is made up of 30 industrial stocks 20 transportation stocks and 15 public utility Standard and Poor s 500 Index o Comprised of 500 major firms across industries o Certain of the S P Indexes contain many more shares broader than the Dow averages do and all of them are based on market values rather than share prices o Basis for estimating the market return o All U S firms but with global exposure o Value weighted not equally weighted DJIA Other Indexes o NYSE Composite Index Stockbrokers Includes 2 100 or so stocks listed on the Big Board NYSE Normally similar to DJIA and S P 500 o The Amex Composite Index Reflects the price of all shares traded on the NYSE Amex Challenge relative to a base of 550 set at December 29 1995 Moves in general direction of S P and NYSE o Nasdaq Composite Index Calculated using the more than 4 000 domestic common stocks traded on the NASDAQ stock market It is based on a value of 100 set on February 5 1971 o Bond Indexes Dow Jones Corporate Bond Index includes 96 bonds 32 industrial 32 financial 32 utilities telecom It reflects the simple mathematical average of the closing prices for the bonds o Act as intermediaries between buyers and sellers of securities They typically charge a commission to facilitate these securities transactions Execute clients buy and sell orders at the best possible price o Stockbrokers must be licensed by both the SEC and the securities exchanges on which they place orders and must follow the ethical guidelines of those bodies o An investor places an order with his or her stockbroker The broker works for a brokerage firm that maintains memberships on the securities exchanges and members of the securities exchange execute orders that the brokers in the firms various sales offices transmit to them Confirmation of the order goes back to the broker placing the order who relays it to the customer This process can take a matter of seconds with the use of sophisticated telecommunications network and internet trading o Street Name securities held by the brokerage firms for safe keeping The firm can transfer the securities at the time of the sale with their signature Street name is actually a common way of buying securities because most investors do not want to be bothered with the handling and safe keeping of stock certificates o Churning responsible brokers do not engage churning that is causing excessive trading of their clients accounts to increase commissions Churning is both illegal and unethical under SEC rules although it is often difficult to prove Investing Tips Types of orders o Not everything online is true o Double check tickers and transactions for accuracy o People trading on emotions are too quick to realize gains and too slow to realize losses o Even with data correctly forecasting the future is hard o Market Order in order to buy or sell stock at the best price available at the time the investor places the order It is generally the quickest way to fill orders because market orders are usually executed as soon as they hit the exchange floor or are received by the market maker o Limit Order an order to buy at or below a specified price a limit buy order or to sell at or above a specified price a limit sell order It is best used when securities prices are fluctuating within a trading range When the investor places a limit order the broker transmits it to a market maker dealing in the security The market maker notes the number of share and price of the limit order in their book and executes the order as soon as the specified limit price or better exists The disadvantage of a limit order is that it can keep you from making a transaction Limit orders for the sale of a stock are also disadvantages when the stock price closely approaches but does not attain the minimum sale price limit before dropping substantially o Stop Order the broker tells the market maker to sell a stock when its market price reaches or drops below a specified level Stop orders are suspended orders placed on stocks they are activated when and if the stock reaches a certain price Investors use these orders to protect themselves against the adverse effects of a rapid decline in share price Investors can also place stop orders to buy a stock although they are far less common When the stop price is reached the automatic order execution limits how far the stock s price can move against the investor Thus the stop order reduces potential losses o Time Limits Fill or kill order which is cancelled if not immediately executed A day order which if not executed is automatically cancelled at the end of the day Good till cancelled GTC order which generally remains in effect for six months unless executed cancelled or renewed o Day Trading day traders buy and sell stocks quickly throughout the day They hope that their stocks