Entrevista a estudiantes Categorías de análisis

FTSElOO London Stock

Exchange Value weighted 100 largest stocks DAX40 Frankfurt Exchange Value weighted 40 largest stocks NIKKEI225 Tokyo Stock Exchange Price Weighted 225largest stocks DOWJONES

INDUSTRIAL AVERAGE

New York Stock

Exchange Price weighted 30 largest stocks NYSE Composite New York Stock

Exchange Value weighted

More than 2,000 largest stocks

NASDAQ Composite NASDAQ Value weighted Almost 5,000 stocks

CAC Paris Exchange Value weighted 40 largest stocks

S&PSOO NYSE and NASDAQ Value weighted 500 largest stocks

2.1.2 COMPUTING INDICES

Learning Objective 1.0.2 – Know the methods of constructing stock indices: Price weighting

Value weighting Equal weighting

Note: Candidates will not be required to calculate indices

In a price weighting scheme a stock with a higher price will have a greater influence on the average. In a value weighted scheme the stock of a company with a larger value (measured by market capitalization = price per share times the number of shares outstanding) will have a greater influence on the average. An equal weighting scheme as the name implies assigns the same importance to every stock comprising the average. The Dow Jones Industrial Average (DJIA) is an example of a price weighted index, while the S&P500 index in the US and the TASI (Tadawul All Shares Index) in Saudi Arabia are examples of value weighted indices.

The Dow Jones Industrial Average (DJIA) is the oldest and most widely known index representing the 30 largest and most significant stocks in the US economy. Originally, the Index was computed by dividing the sum of the 30 stock prices by 30. However, over time, the weights have been altered to reflect stock splits, stock dividends, and new stocks replacing older ones. The implied weight for this index is determined by the share price and it is therefore a price weighted index.

The S&P 500 Index is composed of the 500 largest stocks traded on the US exchanges. The S&P 500 uses market capitalizations as weights - it is a value weighted index. The index's base value was set in the early 1940s, with the base value arbitrarily set as 10. The value of the index is calculated as shown below

[∑ ∑ ] P_t = ending prices for stocks at time t

Q_t = number of outstanding shares at time t P_b = ending prices for stocks at base time Q_b = number of outstanding shares at base time 10 = the assigned value of the index at base time

As an illustrative example examine the data shown in table 2 – 1 for three stocks. Assume that the base year is 2009 and that we wish to construct a value weighted index for the three stocks. Applying the previous equation, it is clear that the value of the index on 31/12/2010 is 10.25

This means that the index rose 0, 25 points. Unlike Dow Jones, the S& P 500 index is not affected by stock splits or stock dividends, as it is mechanically self-adjusting. For example, in the case of stock split, the fall in price is compensated by a corresponding increase in the number of shares, which means that the total value of the firm does not change.

Table 1-1

Data on Value weighted Index for a Hypothetical Market with 3 Stocks

31/12/2009

Stock Price No. of shares Value

(Price x No. of shares)

A 30 2,000 60,000

B 40 4,000 160,000

C 60 3,000 180,000

31/12/2010

A 35 2,000 70,000

B 26.67 6,000* 160,000

C 56.25 3,200** 180,000

∑

* The increase in the number of shares compared to 31/12/2009, is due to a 3:2 split of company B stock

** The increase represents stock dividends.

It should be noted that TASI in Saudi Arabia is a value weighted index

2.2 FINANCIAL MARKETS QUALITY INDICATORS

2.2.1 DESIRABLE CHARACTERISTICS OF MARKETS

Learning Objective 2.2.1 – Understand the desirable characteristics of capital markets:

Market efficiency

Market depth

Market width

Financial markets play a number of roles in the economy. The primary market provides an intermediary function by channeling funds from investors (with savings) to firms and businesses that are seeking funds for investments. Secondary markets reinforce the primary market by providing the flexibility for investors to liquidate their holdings when desired. Financial markets also perform an allocative function, by directing investor savings to business and investments with the highest returns. Firms and businesses that are efficiently operated and are able to identify superior investment opportunities will command higher prices for their securities and will attract the needed capital. Resources thus will flow to the best uses in the economy. However, this depends on whether the market is efficient, in the sense that whether stock prices accurately reflect the expectations about companies‟ performance.

Markets are usually classified under one of three levels of efficiency; weak, semi strong and strong. In the weak form efficient market, stock prices are assumed to reflect all past information including price and volume information which means that abnormal profits cannot be mode of trading based on historical information. The market reflects all publicly available information in the semi strong form efficient markets, while reflecting all information whether public or nonpublic in security prices. In the semi strong form investors cannot make abnormal profits using publicly available information, and not even inside information if the market is efficient at the strong from level.

In addition to efficiency, liquidity is another desirable property in a market. Liquidity enables an investor to sell a security quickly and easily at a fair price. Money market securities such as government treasury bills tend to be very liquid, while real estate assets are typically illiquid. Market participants are willing to pay a premium for securities that are liquid and inflict a discount on securities that are illiquid. The liquidity of a security is particularly affected by market depth and market width.