Market average or index a group of pre selected securities usually chose for some shared FIN3422 Chapter 9 Investment Info and Securities Transactions Market Averages and Indexes characteristic s Purpose o No specific component indo o Don t consider dividend interest or transaction costs o Observe general market movement o Track price and or volume changes through time o Serve as benchmarks o Help forecast market cycles trends and behaviors How to use o Appropriate index o Time period o Compare changes Dow Jones Averages Tracks general behavior of component firms Equally weighted average changes in higher priced components have greater impact on average Divisor maintains comparative relationship over time Multiple dow jones averages o DJ industrial average DJIA 30 total market value broad public ownership high quality o DJ transportation average 20 o DJ utility average 15 o DJ composite average 30 20 15 65 S P 500 Index Standard and Poor s firm that selects index components o 500 major firms across sectors o S P 500 is broader than the DJIA Info technology Financials Industrials Health care Energy o All US firms but with global exposure Almost 50 of the production sales and profits of US firms come from overseas business Amount paid in foreign tax is amount paid in US tax o Considers the market value of constituent firms Value weighted MV closing price x of shares Recall DJIA is equally weighted All Types of Indexes Indexes continually revised throughout the day o Standard cite is the closing price o Change is relative to previous day s closing price NASDAQ composite index 3000 US and International firms o High concentration of technical growth firms The Market Mixed market Most asset types move in the same direction o Individual firm sensitivity to the market varies Bond Indexes MSCI Morgan Stanley Country Indexes Stockbrokers Principle goal execute clients buy and sell orders at the best possible price See chart Usually paid by commissions o Churning Licensed o SEC o Exchanges Street Name o Makes what possible Fast trading Short selling o Provides detailed transaction statements SIPC Securities Investor Protection Corporation Investing Tips Not everything online is true Double check tickers and transactions for accuracy o AAPL and APL are very different Studies show the more frequently you trade o The less likely you are to beat the market Higher transaction costs People trading on emotions fear and greed o Are too quick to realize gains o Are too slow to realize losses opportunity costs Even with data correctly forecasting the future is hard
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