The three most popular stock market indicators in the second group are the Dow Jones Industrial Average, the Standard & Poor’s 500, and the Value Line Composite Average. The DJIA is constructed from 30 of the largest blue chip industrial companies traded on the NYSE. The companies included in the average are those selected by Dow Jones & Company, publisher of the Wall Street Journal. The S&P 500 represents stocks chosen from the two major national stock exchanges and the over-the-counter market. The stocks in the index at any given time are determined by a committee of Standard & Poor’s Corporation, which may occasionally add or delete individual stocks or the stocks of entire industry groups. The aim of the committee is to capture present overall stock market conditions as reflected in a very broad range of economic indicators. The VLCA, produced by Value Line Inc., covers a broad range of widely held and actively traded NYSE, AMEX, and OTC issues selected by Value Line.
In the third group we have the Wilshire indexes produced by Wilshire Associates (Santa Monica, California) and Russell indexes produced by the Frank Russell Company (Tacoma, Washington), a consult- ant to pension funds and other institutional investors. The criterion for inclusion in each of these indexes is solely a firm’s market capitalization. The most comprehensive index is the Wilshire 5000, which actually includes more than 6,700 stocks now, up from 5,000 at its inception. The Wilshire 4500 includes all stocks in the Wilshire 5000 except for those in the S&P 500. Thus, the shares in the Wilshire 4500 have smaller capitalization than those in the Wilshire 5000. The Russell 3000 encompasses the 3,000 largest companies in terms of their market capitalization. The Russell 1000 is limited to the largest 1,000 of those, and the Russell 2000 has the remaining smaller firms.
Two methods of averaging may be used. The first and most common is the arithmetic average. An arithmetic mean is just a simple average of the stocks, calculated by summing them (after weighting, if appropriate) and dividing by the sum of the weights. The second method is the geo- metric mean, which involves multiplication of the components, after which the product is raised to the power of 1 divided by the number of components.
Archive for the ‘Stock market’ Category
Stock Market Indicators, part 2
November 17th, 2010Stock Market Indicators, part 1
November 16th, 2010Stock market indicators have come to perform a variety of functions, from serving as benchmarks for evaluating the performance of professional money managers to answering the question, “How did the mar- ket do today?” Thus, stock market indicators (indexes or averages) have become a part of everyday life. Even though many of the stock market indicators are used interchangeably, it is important to realize that each indicator applies to, and measures, a different facet of the stock market.
The most commonly quoted stock market indicator is the Dow Jones Industrial Average (DJIA). Other popular stock market indicators cited in the financial press are the Standard & Poor’s 500 Composite (S&P 500), the New York Stock Exchange Composite Index (NYSE Composite), the NASDAQ Composite Index, and the Value Line Composite Average (VLCA). There are a myriad of other stock market indicators such as the Wilshire stock indexes and the Russell stock indexes, which are followed primarily by institutional money managers.
In general, market indexes rise and fall in fairly similar patterns. Although the correlations among indexes are high, the indexes do not move in exactly the same way at all times. The differences in movement reflect the different manner in which the indexes are constructed. Three factors enter into that construction: the universe of stocks represented by the sample underlying the index, the relative weights assigned to the stocks included in the index, and the method of averaging across all the stocks.
Some indexes represent only stocks listed on an exchange. Examples are the DJIA and the NYSE Composite, which represent only stocks listed on the NYSE or Big Board. By contrast, the NASDAQ includes only stocks traded over the counter. A favorite of professionals is the S&P 500 because it is a broader index containing both NYSE-listed and OTC-traded shares. Each index relies on a sample of stocks from its universe, and that sample may be small or quite large. The DJIA uses only 30 of the NYSE-traded shares, while the NYSE Composite includes every one of the listed shares. The NASDAQ also includes all shares in its universe, while the S&P 500 has a sample that contains only 500 of the more than 8,000 shares in the universe it represents.
The stocks included in a stock market index must be combined in certain proportions, and each stock must be given a weight. The three main approaches to weighting are: (1) weighting by the market capitalization, which is the value of the number of shares times price per share; (2) weighting by the price of the stock; and (3) equal weighting for each stock, regardless of its price or its firm’s market value. With the exception of the Dow Jones averages (such as the DJIA) and the VLCA, nearly all of the most widely used indexes are market-value weighted. The DJIA is a price-weighted average, and the VLCA is an equally weighted index.
Stock market indicators can be classified into three groups: (1) those produced by stock exchanges based on all stocks traded on the exchanges; (2) those produced by organizations that subjectively select the stocks to be included in indexes; and (3) those where stock selection is based on an objective measure, such as the market capitalization of the company. The first group includes the New York Stock Exchange Composite Index, which reflects the market value of all stocks traded on the NYSE. While it is not an exchange, the NASDAQ Composite Index falls into this category because the index represents all stocks traded on the NASDAQ system.