Market Indexes

What is a market index?

A market index is a group of stocks used to represent part of the stock market.

Example:

Whats a benchmark

benchmark is basically:

"What am I comparing my investment performance to?"

How do we understand a benchmark?

1.the number of securities in a benchmark. 2. the composition of securities in a benchmark. 3. the weighting scheme of a benchmark

What are the three ways an index can be weighted?

Price, Value and Equal Weighted

What is most important in deterring how an index works?

The weighting scheme- how much influence does each stock have on the index

Price Weighted

The stocks price determines how much influence it has on the index

Higher stock price=more influence which could be bad

What can happen under price weighted?

A stock split

Why does a stock split matter?

A stock split lowers the stock's price without changing its value, so the index divisor must be adjusted to prevent the index from artificially changing.

How do you do the math for price weighted

take the average(add them up and add by tat amount) → see the math compared to the previous year

What is value weighted?

Its based on the market vale of the companies

How is market value of the companies determined

Price x number of shares outstanding

Value Weight Index

Current Market Value(price x number of shares)/Base Market Value(first day price x first day number of shares) x 100

what is the Equal Weighted

Each stock gets the same amount of money invested into it. Ex. 100$ and 5 stocks

$100/5=$20.00 into each stock

Does a stock split create value

No, it creates signaling but not value

Example of Price Weighted

Dow Jones, Nikkei Dow

Examples of Value Weighted

S and P 500, S and P 400, S and P 600, New York Stock Exchange, American Stock Exchange Index, NASDAQ, Wilfshire 5000, Russel 1000, Russel 2000, Russel 3000, Tokyo Stock Exchange Index

Examples of Equally Weighted

University of Chicago Center for Research in Security Prices Index

Value Line Index