1 Fin3244 Exam 3 Review Chapters 9 11 Investment info Securities Transactions Chapter 9 Part 1 Market Averages Index s Market average or index A group of pre selected securities usually chosen for some shared characteristics Practical uses o General market movement Whatever characteristic the average or index is tracking o Forecasting look how an index behaved in past times and use it to predict future events no guarantee for future events o Benchmarks The reference point Measure individual performance of stocks against how the market average index preforms Are you tall or short Next to a child very tall but next to a basketball player short It gives us an idea to see how the market is preforming in general so we can compare how your individual company or invest are preforming How to use o Appropriate index What are you trying to measure EX Hold a computer company measure you performance against an index with other computer companies Time period Measuring anything against an index use the exact same time frame Compare by changes One day an index can jump or drop by a few percent NOT DOLLAR AMOUNTS 3 4 and 6 8 are the same percent but 3 dollars and 6 dollars are very different Dow Jones Average o Tracks general behavior of component firms Group of firms that have chosen to be in the average o Equally weighted average Changes in higher priced components have greater impact on average Stock 1 50 goes up 10 up 5 points 2 Stock 2 200 up 10 up 20 points o Divisors maintains comparative relationships over time Adjust for stock spliffs and changes in prices of companies that have gone off and on over the index over time o Multiple Dow jones averages broad overview what s going on in the USA economy DJ industrial averages DJIA 30 total market value broad public ownership high quality Companies in the Dow are specifically chosen because they have large broad public ownership DJ transportation average 20 Trucking fedex Planes Railroads DJ utility average 15 DJ composite average 65 all Just know that there are many averages available depending on what you want to measure you have to use the appropriate index Transportation leading indicator is a good one to look at because an increase can show economic activity is picking up S P 500 Index o Standard Poor s Firm that selects index components 500 major firms across sectors in USA Much broader than DJIA All U S firms but with global exposure Almost 50 of the production sales and profits of U S firms come from overseas business Amount paid in foreign tax amount paid in U S tax Considers the market value of constituents firms Value weighed MV closing price x of shares Recall DJIA is equally weighted Does not consider size of company only looks at price All Types of Indexes o Indexes Continually revised throughout the day Because we have computers that can track the movement of many companies in the stock market Standard cite is the closing price of the day the price that the last trade of the day is made at Change is relative to previous day s closing price o Nasdaq composite index 3000 U S international firms High concentration of technical growth firms The Market This refers to either DOW or S P 500 both these move in the same direction generally 3 Mixed market Dow and S P and Nasdaq 2 are down one is up or 2 are up and one is down Most asset types tend to move in same direction Moves stocks on a good day move in the same direction UP not all but most Bond Indexes same thing with stocks A bunch of Stockbrokers them price just have to trade o Principal goal execute clients buy sell orders at the best possible o Usually paid by commission you do not have to make any money you Churning illegal activity give stockbroker access to your portfolio and allow them to trade on your behalf They might try to get you to do a trade just so they can get commission They are licensed Street Name With the SEC and exchanges they trade on Stock is bought in the name of you brokerage so they are bought by street name It allows faster trading Short selling Provide detailed transaction statements o Point of buying stock Make money Buy low sell high o High frequency computers are making over 50 percent of trades on wall street o Average investors are losing faith in the system people think its rigged Investing Tips o Not everything online is True o Double check tickers and transaction accuracy o Studies shows the more frequently you trade The less likely you are to beat the market Higher transaction cost People trading on emotions fear greed not good Are too quick to realize gains Are too slow to realize losses opportunity costs Even with data correctly forecasting the future is hard Glass half full or half empty everyone has a different opinion on data 4 Basic Order types o Market orders o Limit order o Stop order AKA stop loss order All of these have a trade off Price Certainty vs execution certainty o Critical thinking For each order type What does the order do Why would such an order type be placed What risks are associated with each order type Market order Tell broker to buy sell immediately without regard for price o You assume you will buy sell and price will be close to the last trading price Advantage Disadvantage Certain order execution happens instantaneous Fastest execution speed Price uncertainty Risk in very fast markets price can be significantly different than what expected can happen but unlikely Limit order o Purpose get best price within a trading range o When buying sets a maximum purchase price max you are willing o You will buy if and only if you can buy at that price or better lower to pay price o When selling sets a minimum selling price Sell if and only if the stock meets ATLEAST an amount do not sell Limit Order Process Order entered into order book o if you want to sell you wait until the stock market gets to the price you want to sell it at o If you want to buy and the stock prices seems a little high for you sit until this price hits the price you are willing to pay and you MAY get it Executes a limit price or better after all other orders with higher precedence are executed o Precedence Market order fastest Orders at the same price execute chronologically so if you both set it at 5 the same price who ever put in the order first will get the sale Stop Order o Suspended market order o Activated if specified price is reached Advantage If activated executes with certainty Disadvantage Uncertain Price Main use Examples Limit loses if the
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