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Equity Markets (chapter 2)

Equity Markets (chapter 2). Equity Markets. New York Stock Exchange An Agency Auction Market Market in which brokers represent buyers and sellers and prices are determined by supply and demand. . www.nyse.com. Trading

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Equity Markets (chapter 2)

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  1. Equity Markets (chapter 2)

  2. Equity Markets • New York Stock Exchange • An Agency Auction Market • Market in which brokers represent buyers and sellers and prices are determined by supply and demand. www.nyse.com • Trading • All trading in a specific stock is done at the post where that stock is assigned on the NYSE floor. • Trading is managed by the specialist.

  3. AmericanStockExchange • AMEX is also a specialist auction market • Lower listing standards than NYSE • More than 1,000 listings • 140+ Exchange Traded Funds • 15+ HOLDRs • 350+ structured products • www.amex.com

  4. Nasdaq • Electronic market • Negotiated market • Market makers are dealers • Price determination through bargaining • 3,600+ issues • more technology firms • Dell, Microsoft, Intel www.nasdaq.com

  5. Other U.S. stock markets • Nasdaq SmallCap Market • 800 small firms seeking Nasdaq market maker sponsorship • No penny stocks (price < $1) • Over-the-Counter Bulletin Board • 3,000+ securities offered by 300+ market makers • Penny stocks traded here • Electronic Communication Networks (ECNs) • Electronic market for institutional investors to trade with each other

  6. Dow Averages • Charles Dow and Edward Davis Jones • Credited with inventing the stock index • First stock index created in 1884 • 11 firms • Mostly railroad companies • Added up the stock prices and divided by 11. (price average index) • DJIA was started in 1896 with 12 stocks • DJUA, DJTA

  7. Dow Jones Industrial Average • 30 companies • Most important and largest firms • Selected by the editors of the Wall Street Journal • Formula While originally 30, the divisor has been steadily reduced to account for stock splits. At the beginning of 2006 the divisor was 0.12493117. Note that a $1 change in a stock’s price causes the DJIA to change by 8 (=1/ 0.12493117)

  8. Problems with price-weighted averages • Stock splits require changes in the divisor • Larger priced stocks move the index more than smaller priced stocks for the same % price move. • A $100 stock that increases 10% changes by $10. A $10 stock that increases 10% changes by $1. A change of $10 moves the DJIA ten times more than a $1 change. • Difficult to index to a price-weighted average.

  9. Standard & Poor’s 500 Index • The 500-firm index started in 1957 • Value weighted index • Determine market capitalization of each firm (stock price × shares outstanding) • Add up the market capitalization for all 500 firms • Generally the largest 500 firms in the U.S. • However, it is designed to match the sectors weights of the overall market composition.

  10. More Popular Indices • Russell Indexes • Russell 3000 uses the 3,000 largest U.S. companies • Represents 98% of the investable US equity • Russell 1000 uses the 1,000 largest U.S. companies • Represents 92% of the investable US equity • Russell 2000 uses the 2,000 smallest companies n the Russell 3000 • Considered a small cap index.

  11. Dow Jones Wilshire • Dow Jones Wilshire 5000 Composite Index • Most comprehensive measure of the U.S. stock market • Designed to represent the performance of all US-headquartered equity securities • Contains 4,972 stocks (beginning of 2006) • Dow Jones Wilshire 4500 • Contains the Wilshire 5000 firms less the S&P 500 firms • Considered a mid-cap index

  12. Nasdaq Indexes • Nasdaq Composite Index • All common stocks listed on the Nasdaq Stock Market • 3,175 firms • Market value-weighted • Nasdaq 100 Index • Largest 100 firms on the Nasdaq Stock Market • Large stock index, but technology oriented

  13. Standard & Poor’s • S&P 500 • S&P MidCap 400 Index • 400 firms • Stocks with market caps of $1.5 to $10 billion • S&P SmallCap 600 Index • 600 firms • Average market cap of $600 million

  14. Global Stock Indexes • Major Local Stock Market Index • Nikkei, Dax, FTSE • Morgan Stanley Capital International Indexes • Global, regional, and local indexes • Emerging and developed markets

  15. Securities Market RegulationLegislation Important to Investors, Issuers of Securities and Brokers/Dealers Securities Act of 1933 • Applies to firms going public—issuing new securities • Requires firms to register with government • Requires firms to provide investors with financial and material information • Exempts private placements and small issues Securities Exchange Act of 1934 • Focuses on securities trading • Creates and authorizes Securities and Exchange Commission (SEC) to enforce statutes, rules, and regulations • Protects investors against fraud

  16. Self-Regulatory Organizations (SROs) • SEC delegates regulatory authority • National Association of Securities Dealers (NASD) • Regulates Nasdaq and OTC • Monitors sales practices • Administers tests and licenses for individuals • Ensures accurate sales information • NYSE, AMEX, CBOE--business practices and market operations • Municipal Securities Rulemaking Board • Banks—Fed Reserve, Comptroller of Currency, FDIC

  17. Learning objectives Discuss the trading on NYSE, AMEX and Nasdaq Discuss the other US stock markets Discuss the DJIA andS&P500 indices. Know the Russell and Wilshire indices Discuss the Self Regulatory organizations.

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