Securities Exchanges
Securities Indices
Securities Exchanges
There are nine major stock exchanges in the U.S. Two of these, the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX), are national in scope. There are also several exchanges for the trading of options and futures contracts
An exchange provides a facility its members to trade security, and only members of the exchange may trade there. Therefore memberships, or seats, on the exchange are valuable assets. A seat on NYSE has sold over the year for $4,000 in 1878, $35,000 in 1977 and as high as $1,150,000 in 1997 before falling after that.
The NYSE is the largest single exchange. The shares of near 2,300 firm trade there, and nearly 3,000 stock issues (common and preferred stock) are listed. Firm which wants to trade on NYSE must correspond to such conditions: pre-fax profit is more or equal $2,500,000; number of stocks is more or equal 1,100,000 within minimum market prices $1,800,000.
The AMEX also is national in scope, but it focuses more on listing smaller and younger firms than does the NYSE. Here trade more than 840 firms.
Another large stocks trade institution in U.S. is NASDAQ (National Association of Securities Dealers Automatic Quotations), where trade over than 4700 firms (large, middle, small developing).
The over-the-counter (OTC) NASDAQ market has posed a bigger competitive challenge to the NYSE. Many large firms that would be eligible to list their shares on NYSE now choose to list on NASDAQ. Some of the well-known firms currently trading on NASDAQ are Microsoft, Intel, Apple Computer, Sun Microsystems, and MCJ Communications. Total trading volume in over-the-counter stocks on the computerized NASDAQ System has increased six times in the last decade.
Roughly 35,000 issues are traded on the over-the counter market and any security may be traded there, but the OTC market is not a formal exchange. There are no membership requirements for trading, nor are there listing requirements for securities. In the OTC market thousands of brokers register with the SEC (Securities and Exchange Commission) as dealers in OTC securities. Security dealers quote prices at which they are willing to buy or sell securities. A broker can execute a trade by contacting the dealer listing an attractive quote.
The biggest non-U.S. markets:
The London Stock Exchange;
The Tokyo Stock Exchange (TSE);
The German (Frankfurt-on-Main) Stock Exchange;
The Zurich Stock Exchange;
The Paris Stock Exchange;
The Osaka Stock Exchange;
The Toronto Stock Exchange.
Securities Indices
The daily performance of the Dow Jones Industrial Average is a staple portion of the evening news report. Although the Dow is the best-known measure of the performance of the stock market, it is only one of several indicators. Other more broadly based indexes are computed and published daily. In addition, several indexes of bond market performance are widely available.
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Dow Jones Averages
The Dow Jones Industrial Average (DJIA) of 30 large, so-called blue-ship corporations has been computed since 1896. Originally, the DJIA was calculated as the simple average of the stock included in the index. But now the DJIA is not simple average: its form so, that stocks which have higher value have higher weight. Because the Dow measures the return on a portfolio that holds one share of each stock, it is called a price-weighted average. The amount of money invested in each company represented in the portfolio is proportional to that companys share price. Price-weighted average ones give higher-priced shares more weight in determining performance of the index.
Dow Jones & Company also computes:
Dow Jones Transportation Average of 20 airline, trucking and railroad stocks;
Dow Jones Public Utility Average of 15 electric and natural gas companies;
Dow Jones Composite Average, combining the 65 firms (30+20+15) of the three separate averages. Each is a price-weighted average, and thus one overweight the performance of high-priced stocks.
Besides Dow Jones Indexes widely spread:
Standard& Poors 500 (S&P500) index;
The NYSE Composite index;
The NASDAQ Composite index;
The AMEX Market Value index;
Value-Line;
The Russel 2000;
The Wilshire.
2.2.2. Standard & Poors Indices
The Standard & Poors Composite 500 (S&P500) stock index represents an improvement over the Dow Jones Averages in two ways. First, it is a more broadly based index of 500 firms. Secondly, it is a market-value-weighted index.
The S&P500 is computed by calculating the total market value of the 500 firms in the index and the total market value of those firms on the previous day of trading. The percentage increase in the total market value from one day to the next represents the increase in the index. The rate of return of the index equals the rate of return that would be earned by the investor holding a portfolio of all 500 firms in the index in proportion to their market values, except that the index does not reflect cash dividends paid by those firms.
Standard & Poors also publishes:
The 400-stock Industrial Index;
The 20-stock Transportation Index;
The 40-stock Utility Index;
The 40-stock Financial Index.
Some Other Market Value Indices
The New York Stock Exchange publishes a market value-weighted composite index of all NYSE-listed stocks, in additional to sub-indexes for industrial, transportation and financial stocks. The American Stock Exchange (AMEX) also computes a market value-weighted index of its stocks. These indexes are even more broadly based than the S&P500. The National Association of Securities Dealers publishes an index of nearly 3,000 OTC firms using the NASDAQ service.
The ultimate U.S. equity index so far computed is the Wilshire 5000 index of the market value of all NYSE and AMEX stocks plus actively traded OTC stocks. Despite its name, the index actually includes about 6,000 stocks.
The Value Line index is an equally weighted geometric average of the performance of about 1,700 firms. Note that the geometric average is less than the arithmetic average. This is a general property: whenever there is variation in performance among the stocks in an index, the geometric average will be less than the arithmetic average. For this reason the Value Line index provides a down-biased measure of the rate of purchasing an equally weighted portfolio of all the stocks in the index.
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Development in financial markets worldwide includes the construction of indexes for these markets.
The most important non-U.S. indices are:
The Nikkei;
FTSE;
DAX.
The Nikkei 225 is a price-weighted average of the largest Tokyo Stock Exchange (TSE) stocks. The Nikkei 300 is a value-weighted index.
FTSE is published by the Financial Times of London and is a value-weighted index of 100 of the largest London Stock Exchange corporations.
The DAX index is the premier German stock index, includes Germans blue-ship.
Bond Markets Indicators
There are three most widely known bond market indicators:
Merrill Lynch:
Lehman Brothers;
Salomon Brothers.
The Lehman and Salomon Brothers indexes are computed monthly, and all measure total returns as the sum of capital gains plus interest income derived from the bonds during the month. Any intra-month cash distributions received from the bonds are assumed to be invested during the month at the T-bill rate.
The Merrill Lynch indexes are computed daily.
