Stock and Bond MARKET INDEXES (AssetClasses2) Flashcards
What are financial indexes?
statistical measure of the value of a securities market
What is the Dow?
Dow Jones Industrial Average
The DOW is a price-weighted index, which means it calculates the index based on the price of each stock, not the market capitalization (the total value of the company’s shares). This method results in stocks with higher prices having more influence on the index, even if those companies are smaller in overall value compared to others in the index.It represents a hypothetical portfolio that holds one share of each of the 30 companies.
What can happen that proves that the Dow doesn’t work?
- Stock splits (when a company splits its stock into more shares, lowering the price).
- Big dividend payments (like when a company pays a dividend that’s more than 10% of the stock price).
- Companies being replaced (when one company is removed from the list and another one is added).
In these cases, the divisor
(originally, the number of companies in the index) is adjusted so as to leave the index value unchanged. It helps keep the index stable.
What is the The S&P 500?
Standard & Poor´s Composite index
Basket of 500 stocks; hence, it is much broader than the Dow´s.
The index is** value-weighted**, which means the portfolio is weighted by market capitalization (market price of a stock multiplied by the number of common shares outstanding).
What does the S&P 500 % result of our calculation represent?
it is the daily % change, it represents the actual increase in market value
What is the NASDAQ?
National Association of Securities Dealers Automatic Quotation
This is a stock exchange. It is known for being the home of many technology companies. Historically, it became the predominant market for technology stocks because it was the first electronic exchange.
What is the NASDAQ Composite?
broad-based index (it includes a wide variety of NASDAQ companies’ stocks) that shows how stocks on the NASDAQ are pertforming overall
like a list that shows how the overall NASDAQ is doing, including everything it sells
What is the NASDAQ 100?
This is a smaller index that tracks only the 100 largest and most actively traded stocks on the NASDAQ.
includes major tech companies like Microsoft, Apple, Meta (formerly Facebook), and Alphabet (Google’s parent company)
What is the Wiltshire 5000?
the broadest, most inclusive of all US Stock Markets. It is made up of about 3,5000 stocks, a basket of all actively traded shares in the US.
What is an Equal-Weight Index? Give 2 advantages and 1 challenge.
treats each stock in the index the same, regardless of its market size. This means that even smaller companies have the same impact on the index as larger companies.
Advantages:
- Higher Diversification: Since smaller stocks are weighted equally, there is less risk of one or two large companies dominating the index.
- Historically Better Returns: Equal-weight indexes tend to benefit from smaller stocks outperforming larger ones, especially when market conditions favor smaller companies.
Challenges:
- Rebalancing: To maintain equal weights, the index must be rebalanced regularly, which can lead to higher trading costs compared to other indexes like market-cap-weighted ones.
Passive Asset Management
What are Passive Strategies?
Passive asset management is a low cost strategy where you** invest in index funds or ETFs** to match the performance of an index or market sector (for example, the S&P 500). The goal is not to outperform the market but to match its returns.
the strategy is essentially to “copy the market” rather than trying to outperform it
tools most commonly used in passive investing
What are index funds?
mutual funds that replicate a market index (like the S&P 500) by holding its securities in matching proportions, and they trade only at day’s end (so once a day) with their value determined by the net asset value (NAV)
NAV = assets - liabilities / n of shares currently owned (outstanding)
used in passive investing
What are ETFs?
exchange-traded funds
similar to index funds, but they are structured as a marketable security. While Index funds can
only be traded at the end of the day at the fund´s closing NAV (net asset value), ETFs can be traded on a exchange
(normally NASDAQ) and/or electronic platform during the day
basically they also mimic the market, but they can be traded on stock exchanges and several times a day
Foreign Indexes
There are stock indexes in all the major financial markets. To name the most important: Nikkei (Japan), DAX (Germany)
and the FTSE (the footsie, UK). There are also major international indexes, constructed by MSCI (Morgan Stanley Capital International). The most important of these are the MSCI World, MSCI ACWI, and MSCI Europe.
Bond Indexes
- also market-weighted indexes
- Given the lack of liquidity in some segments of the bond market, valuations are trickier than for stock indexes.
