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Equity Markets (chapter 2)

Explore the New York Stock Exchange, Nasdaq, American Stock Exchange, and other U.S. stock markets, including market structures, indices, and securities market regulation legislation.

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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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