Equity Markets

1

• Equity Markets
• (chapter 2)

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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.

2005
NYSE Average Daily Stock Volume (millions) 1,604
NYSE Average Trade Size per Sale (in shares) 334
Number of NYSE Non-US Stocks 453
NYSE Dollar Value of Trading Activity (billions of dollars) 56.1
Programs as of Total NYSE 56.9
Companies Listed on the NYSE 2,779
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American Stock Exchange

• 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

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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
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Other U.S. stock markets

• Nasdaq SmallCap Market
• 800 small firms seeking Nasdaq market maker
  sponsorship
• No penny stocks (price lt 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

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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

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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 stocks price causes
  the DJIA to change by 8 (1/ 0.12493117)

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3M Co.
Alcoa Inc.
Altria Group Inc.
American Express Co.
American International Group Inc.
Boeing Co.
Caterpillar Inc.
Citigroup Inc.
Coca-Cola Co.
E.I. DuPont de Nemours Co.
Exxon Mobil Corp.
General Electric Co.
General Motors Corp.
Hewlett-Packard Co.
Home Depot Inc.
Honeywell International Inc.
Intel Corp.
International Business Machines Corp.
Johnson Johnson
JPMorgan Chase Co.
McDonald's Corp.
Merck Co. Inc.
Microsoft Corp.
Pfizer Inc.
Procter Gamble Co.
SBC Communications Inc.
United Technologies Corp.
Verizon Communications Inc.
Wal-Mart Stores Inc.
Walt Disney Co.
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.

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Standard Poors 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
• Scale (Index Base set to 10)
• Generally the largest 500 firms in the U.S.
• However, it is designed to match the sectors
  weights of the overall market composition.

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Index Example

• Consider 3 stocks.
• Stock A is 40 and has 300 shares outstanding
• Stock B sells for 60, outstanding shares of 200
• Stock C costs 80 and has 100 shares.
• Consider two indices
• Price-weighted average, divisor2.5
• Value-weighted average
• Base index value 100
• The stock originally sold for 30, 50, and 60
  with outstanding shares of 300, 100, and 100,
  respectively

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What is the value of each index?

• Price-weighed average
• (40 60 80) / 2.5 72.00
• Value-weighted index
• (40X300 60X200 80X100) / (30X300
  50X100 60X100) 100
• 32,000 / 25,000 100 128.00

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What is the value of each index after the 40
stock changes to 45?

• Price-weighed average
• (45 60 80) / 2.5 74.00 a 2.78 change
• Value-weighted index
• (45X300 60X200 80X100) / (30X300
  50X100 60X100) 100
• 33,500 / 25,000 100 134.00 a 4.69 change

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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.

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Dow Jones Wilshire 5000 (Full Cap) Price
Dow Jones Wilshire 4500 (Full Cap) Price
Dow Jones Wilshire 2500 Price
Dow Jones Wilshire U.S. Large-Cap Price
Dow Jones Wilshire U.S. Mid-Cap Price
Dow Jones Wilshire U.S. Small-Cap Price
Dow Jones Wilshire U.S. Micro-Cap Price
Dow Jones Wilshire U.S. Large-Cap Growth Price
Dow Jones Wilshire U.S. Large-Cap Value Price
Dow Jones Wilshire U.S. Mid-Cap Growth Price
Dow Jones Wilshire U.S. Mid-Cap Value Price
Dow Jones Wilshire U.S. Small-Cap Growth Price
Dow Jones Wilshire U.S. Small-Cap Value Price
Wilshire Large Cap 750
Wilshire Mid Cap 500
Wilshire Small Cap 1750
Wilshire Micro Cap
Wilshire All Growth
Wilshire All Value
Wilshire Large Growth
Wilshire Large Value
Wilshire Mid Growth
Wilshire Mid Value
Wilshire Small Growth
Wilshire Small Value
Wilshire Small Cap 250
Wilshire Small Cap 250 Price
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 SP 500
  firms
• Considered a mid-cap index

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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

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Standard Poors

• SP 500
• SP MidCap 400 Index
• 400 firms
• Stocks with market caps of 1.5 to 10 billion
• SP SmallCap 600 Index
• 600 firms
• Average market cap of 600 million

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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

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Securities Market RegulationLegislation
Important to Investors, Issuers of Securities and
Brokers/Dealers

• Securities Act of 1933
• Applies to firms going publicissuing 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

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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
• BanksFed Reserve, Comptroller of Currency, FDIC

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Circuit Breakers and Trading Limits

• On Monday, October 19, 1987, the DJIA lost over
  22 of its value in a crash.
• This event lead to the enactment of circuit
  breakers that pause or close trading during fast
  moving markets.
• Breakers are set to 10, 20, and 30 of recent
  DJIA level.
• At DJIA 10,000, the breakers are changes of
  1,000, 2,000, and 3,000.
• The first breaker halts trading for 30 to 60
  minutes.
• The 2nd breaker halts trading for 2 hours and the
  third breaker stops trading for the day.
• Collars restricts index arbitrage when DJIA
  moves 200 points.
• Curbs are in

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Learning objectives
Discuss the trading on NYSE, AMEX and Nasdaq
Discuss the other US stock markets Discuss the
DJIA andSP500 indices. Know how to calculate the
indices. See the example in the slides. Know the
Russell and Wilshire indices Discuss the Self
Regulatory organizations. Discuss the Circuit
Breakers and Trading limits. End of chapter CFA
problems 2.1 and 2.2