Essay About Note Chapter 3Understanding Market Averages And Indexes Nb

Econ 2121 Note Chapter 3
Econ 2121 Note Chapter 3Understanding Market Averages and Indexes NB 94-106Studying the performance of market averages and indexes allow you to convenientlyGauge general market conditionsCompare your portfolio’s performance to that of a large, diversified (market) portfolioStudy the market’s historical performance and use that as a guide to understand future market behaviorStock Market Averages and IndexesBond Market IndicatorsStock Market Averages and IndexesAverages: reflect the arithmetic average price behavior of a representative group of stocks at a given point in time.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.Stock Market Averages and IndexesThe Dow Jones AveragesDow Jones Industrial Average (DJIA): average made up of 30 stocks, most of which are issued by large, well-respected companies with long operating histories from industry sectors such as technology, transportation, banking, energy, healthcare, consumer products and many others.Price-weighted (stocks with higher prices get more weight than stocks with lower prices)Stock makeup can change due to a merger or bankruptcy as well as when Dow Jones believes the average does not reflect the broader market.[pic 1]Stock Market Averages and IndexesThe Dow Jones AveragesDow Jones Transportation Average: based on 20 stocks, including railroads, airlines, freight forwarders and mixed transportation companiesDow Jones Utility Average: comprised of 15 public utility stocksDow Jones Composite Average: made up of 65 stocks, including 30 industrials, 20 transportations and 15 utilitiesDow Jones also publishes numerous indexes including:U.S. Total Stock Market IndexIndexes for various sectors based on company size (e.g. large cap, mid cap, small cap) or industry.Indexes that track global equities market, developed and emerging stock markets, and regional markets in Asia, Europe, the Americas, the Middle East, and Africa.Stock Market Averages and IndexesStandard & Poor’s Indexes: Many investors feel they provide a more broad-based and representative measure of general market conditions than do the Dow averages.  They are widely used, frequently as a basis for estimating “market return”S&P 500 Index: Common stock index comprising 500 large (but not necessarily the largest) companies [pic 2]NOTE THE S& P and most other indices are market capitalization indices.They are based on market “cap”.   This is the price of a share x number of shares.Stock Market Averages and IndexesNYSE, NYSE MKT, and Nasdaq Indexes: each index reflects the movement of stocks listed on its exchangeNYSE Composite Index: includes all stocks listed on the NYSE; behavior of index is normally similar to that of the DJIA and S&P 500 indexes.NYSE MKT Composite Index: reflects the price of all shares traded on the NYSE MKT Exchange; tends to move in the general direction, but not exactly as the S&P and NYSE indexesNasdaq Stock Market Indexes: reflect Nasdaq stock market activityComposite Index: most comprehensive, calculated using 3,000 common stocks traded on the NasdaqNasdaq 100: includes 100 of the largest domestic and international nonfinancial companies listed on NasdaqBiotech and Computer IndexesMovements of these indexes are often sharper than those of the other major indexesStock Market Averages and IndexesValue Line Indexes: stock indexes constructed by equally weighting the price of each stock included to eliminate the bias of stocks with large total market values.Value Line Composite Index: includes nearly 1,700 stocks in the Value Line Investment Survey that are traded on the NYSE, NYSE MKT, and OTC markets.Other Averages and IndexesFrank Russell Company (pension advisory firm) publishes three primary indexes:Russell 1000: 1,000 largest companiesRussell 2000: 2,000 small to medium-sized companiesRussell 3000: 3,000 companies in the Russell 1000 and 2000Wall Street Journal publishes a number of global and foreign stock market indexes:World IndexEurope/Australia/Far East (EAFE MSCI) IndexBond Market IndicatorsBond YieldsBond yield: the return an investor would receive on a bond if it were purchased and held to maturityReported as annual rates of returnReflects the interest payments an investor receives as well as gains or losses in the bond’s value from the date of purchase until it is redeemedBond IndexesDow Jones Corporate Bond Index: equal-weighted index of 96 U.S.-issued corporate bonds:48 industrial36 financial12 utilityYou need to understand how to make securities transactions based on the information you’ve used to locate attractive security investments.The Role of StockbrokersBasic Types of OrdersOnline TransactionsTransaction CostsInvestor Protection: SIPC and ArbitrationThe Role of StockbrokersStockbrokers: (also called account executives, investment executives, and financial consultants) act as intermediaries between buyers and sellers of securitiesMust be licensed by both the SEC and the securities exchanges where they place ordersClient places order with stockbroker. Stockbroker 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 firm’s various sales offices transmit to themFor transactions in markets such as Nasdaq, brokerage firms typically transmit orders to market makers; these transactions are executed rapidly due to competition among dealers  → OTCThe Role of StockbrokersBrokerage ServicesPrimary service is to execute clients’ purchase and sale transactions at the best possible priceClient’s security certificates are typically held in street nameStreet name: stock certificates issued in brokerage firm’s name, but held in trust for the client who actually owns themResearch information is often provided on specific stocks or economic conditionsStatements showing detailed account transactions are providedThe Role of StockbrokersTypes of Brokerage FirmsFull-Service Broker: offers an investor a full array of brokerage services such as providing investment advice and information, holding securities in street name, offering online brokerage services and extending margin loansPremium Discount Broker: focus primarily on making transactions for customers.Charge low commissionsLimited free research information and investment adviceBasic Discount Broker: typically deep-discount brokers through whom investors can execute trades electronically online via a commercial service, on the Internet, or by phone.The Role of StockbrokersOpening an AccountSingle or JointJoint accounts are most common between a husband and wife or parent and childCustodial account: brokerage account of a minor that requires a parent or guardian to be involved in all transactionsCash or MarginCash account: brokerage account where customer can make only cash transactionsMargin account: brokerage account in which brokerage firm extends borrowing privileges to a creditworthy customerWrap account: account that allows brokerage customers with large portfolios to shift stock selection decisions to a professional money manager, in return for a flat annual feeThe Role of StockbrokersOdd-Lot and Round-Lot TransactionsOdd lot: order consists of less than 100 shares of stockRound lot: orders for a 100-share unit or multiples thereofBasic Types of OrdersMarket Order:Orders to buy or sell stock at the best price available at the time the order is placedQuickest way to fill orderLimit Order:Order to buy at or below a specified price (limit buy order) or to sell at or above a specified price (limit sell order)Fill-or-Kill: order cancelled if not immediately filledDay Order: order expires at the end of the day if not filledGood-’til-Canceled (GTC) Order:  Order remains in effect for six months unless executed, canceled, or renewedBasic Types of OrdersStop-Loss Order:“Suspended order” placed to sell a stock if the price reaches or falls below a specified levelOrders can be day orders or GTC ordersOnce activated, becomes a market orderUsed to protect against adverse effects of a rapid decline in share priceCan also use stop orders to buy stocks, such as to limit risk on short salesStop-Limit Order: order to buy or sell stock at a given or better price once a stipulated stop price has been metPrevents sales at an undesirable priceNo sale may occur if price continues to decline