Chapter 7: Markets

Question 1

What is a stock exchange?

Answer 1

A stock exchange is simply a place where financial instruments can be purchased or sold.

It is where sellers are matched with buyers and transactions are agreed.

Question 2

What is an IPO?

Answer 2

The process of a company becoming listed and having its shares admitted to trading on a stock exchange for the first time.

Question 3

Give three reasons a company would choose to IPO.

Answer 3

Reasons for IPO:
1) Raising money by selling shares
2) Increasing the public profile and awareness of the company
3) Makes it easier for investors to buy and sell company shares - shares become more liquid

Question 4

What is a stock exchange index?

Answer 4

A stock exchange index such as the Dow Jones Industrial Average (DJIA) calculates an amalgamation of share price changes.

If the index has increased, then prices in general have increased.
If the index decreases, then prices have decreased.

Question 5

How do stock market indexes account for companies of different sizes?

Answer 5

The stock market index accounts for the size of different firms by applying a weighting to different price movements.

So the price movements of larger firms have a bigger effect on the overall index.

Question 6

What is the DJIA?

Answer 6

The Dow Jones Industrial Average (DJIA) consists of 30 large listed US companies that are listed on the New York Stock Exchange (NYSE) or NASDAQ.

Question 7

Name the main stock market index in the following jurisdictions:
1) US (2)
2) UK
3) Germany
4) Hong Kong/China
5) Japan

Answer 7

1) Dow Jones Industrial Average (DJIA) and S&P 500
2) FTSE 100
3) DAX
4) Hang Seng
5) Nikkei 225

Question 8

Name the jurisdiction that the following stock market indexes cover:
1) Dow Jones Industrial Average (DJIA) and S&P 500
2) FTSE 100
3) DAX
4) Hang Seng
5) Nikkei 225

Answer 8

1) US
2) UK
3) Germany
4) Hong Kong/China
5) Japan