Question

Assignment #1 In following financial markets, investors, traders and analysist follow various indexes. In a short one to two page essay answer the following thoroughly and efficiently. What is an Index? What is the Dow Jones Industrial Average Index? What is the NASDAQ index? What is the S&P 500 Index? What is the Russel 2000 Index? Compare and contrast these indexes. What might be a possible advantage in following any of the above indexes?

Answer 1

Answer- In financial markets Investors, Traders and Analysist follow various Indexes some of them are explained as follows-

Firstly we should know what is Index-

Index is a measurement of a section of the stock market. Index is used by the investors and financial managers as a tool to describe the market and compare the return on specific Investments. The Primary criteria of an Index are that it is Investable and Transparent. The index are classified in many ways, A world or global stock market Index- Such as MSCI World or the S & P Global 100 which includes stocks from multiple regions. The regions may be defined geographically or by levels of industrialization or income.

An Index may also be classified according to the method used to determine its price. In a price weighted Index such as Dow Jones Industrial Average, NYSE Arca Major market index, etc. the price of each component stock is the only consideration when determining the value of Index. We also have capitalised weighted Index such as the S & P 500 or Hang Seng Index factor is the size of the company. Thus a relatively small shift in the price of a large company will heavily influence the value of Index.

So the Index which is commonly known as stock Index or Stock market Index is measurement of stock of stock market.

Dow Jones Industrial Average Index- The Dow Jones Industrial Average (DJIA) or simply the Dow is a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States. It is the second-oldest U.S. market index.

Investing in DJIA is possible via Index funds as well as via Derivatives such as option contracts and future contracts.

In DJIA the value of the index is sum of the price of one share of stock for each component company divided by a factor. To calculate DJIA the sum of price of all 30 Stocks is dived by a Dow Divisor.

Although it is one of the most commonly followed Index, but many consider the Dow not to be a good representation of the US Stock Market because it includes only 30 large capital companies.

NASDAQ- NASDAQ is a stock market index of the common stocks and similar securities listed on the NASDAQ Stock market. The index was launched in 1971, with a starting value of 100. Over the years, the index has soared tremendously despite multiple periods of decline.

Along with the Dow Jones Industrial Average and S&P 500 it is one of the three most-followed indices in US stock markets. The composition of the NASDAQ Composite is heavily weighted towards information technology companies. Investing in the NASDAQ Composite Index is currently made accessible through an exchange-traded fund issued by fund manager Fidelity Investments.

To be eligible for inclusion in the Composite, a security's U.S. listing must be exclusively on the NASDAQ Stock Market and must be one of the following security types:-

American Depositary Receipts (ADRs), Common Stock, Limited Partnership Interests, Ordinary Shares, Real Estate Investment Trusts (REITs), Shares of Beneficial Interest (SBIs), Tracking Stocks.

Closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities are not included.

S & P 500 Index- The S&P 500 is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices, and many consider it to be one of the best representations of the U.S. stock market. The S&P 500 is a capitalization-weighted index and the performance of the 10 largest companies in the index account for 21.8% of the performance of the index.

Although the index includes only companies listed in the United States, it includes many multi-national companies; companies in the index derive on average only 71% of their revenue in the United States.

The S&P 500 is maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global and its components are selected by a committee.

Investors may also invest in all the stocks of the S&P 500 directly, which is called index replication. However, investors usually have to purchase at least 1 share of a stock, which may have a weight of 0.02%. Exactly replicating the index by buying the stocks of all 500 individual companies is likely not feasible.

The index is a capitalization-weighted index; that is, movements in the prices of stocks with higher market capitalizations (the share price times the number of shares outstanding) have a greater impact on the value of the index than do companies with smaller market capitalizations.

However, to calculate the market capitalization of each company and therefore value of the index, Standard & Poor's uses only the number of shares available for public trading ("public float"), and excludes shares held by insiders or controlling shareholders that are not publicly traded. To keep the S&P 500 Index consistent over time, it is adjusted to capture corporate actions which affect market capitalization, such as additional share issuance, dividends and restructuring events such as mergers or spin-offs. To remain indicative of the largest public companies in the United States, the constituent stocks are changed from time to time. To prevent the value of the index from changing merely as a result of corporate financial actions, all such actions affecting the market value of the Index require a divisor adjustment. Also, when a company is dropped and replaced by another with a different market capitalization, the divisor needs to be adjusted in such a way that the value of the S&P 500 Index remains constant. All divisor adjustments are made after the close of trading and after the calculation of the closing value of the S&P 500 Index.

To calculate the value of the S&P 500 Index, the sum of the adjusted market capitalization of all 500 stocks is divided by a factor, usually referred to as the Divisor.

Russell 2000 Index- The Russell 2000 Index is a small-cap stock market index of the smallest 2,000 stocks in the Russell 3000 Index. It was started by the Frank Russell Company in 1984. The index is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group.

The Russell 2000 is by far the most common benchmark for mutual funds that identify themselves as "small-cap", while the S&P 500 index is used primarily for large capitalization stocks. It is the most widely quoted measure of the overall performance of the small-cap to mid-cap company shares. The index represents approximately 10% of the total market capitalization of the Russell 3000 Index. Similar small-cap indices include the S&P 600 from Standard & Poor's, which is less commonly used, along with those from other financial information providers.

Many fund companies offer mutual funds and exchange-traded funds (ETFs) that attempt to replicate the performance of the Russell 2000. Their results will be affected by stock selection, trading expenses, and market impact of reacting to changes in the constituent companies of the index. Note that it is not possible to invest directly in an index.

So the above mentioned are the Index and Indexes which have there own advantages and they do contrasts with each other in a one or other way.