Stock indices represent a fundamental tool in financial markets, both for their usefulness as market indicators and for their role as underlying assets in the trading of derivative products. Today, the stock market world has been transformed into a global and interconnected “continuous market”, where the course of each stock market affects to a greater or lesser degree, in the course of the others the progression of globalization turns the international stock market indexes into best instruments to avoid or anticipate surprises in the national stock markets.
What is the bag?
Stock Exchanges can be defined as organized and specialized markets, in which transactions with securities are carried out through authorized intermediaries, known as Brokerage Houses or Stock Market Stations. The Stock Exchanges offer the public and their members the technical facilities, mechanisms and instruments that facilitate the negotiation of securities subject to public offering, at prices determined by auction. Depending on when a security enters the market, these negotiations would be settled in the primary market or in the secondary market.
Features
The main functions of the Stock Exchanges include providing participants with true, objective, complete and permanent information on the securities and companies listed on the Stock Exchange, their issues and the operations that are carried out on it, as well as supervising all their activities., regarding strict adherence to current regulations.
Importance of Stock Exchanges
The resources invested through the Stock Exchanges allow both companies and governments to finance productive and development projects that generate jobs and wealth for a country. The contributors of these resources receive in exchange the opportunity to invest in a basket of instruments that allows them to diversify their risk, optimizing their returns. It is important to highlight that the Stock Exchanges are complementary markets to the traditional Financial System.
History
The origin of the Stock Exchange as an institution dates back to the end of the 15th century in the medieval fairs of Western Europe. At these fair, the practice of transferable securities and titles began. The term "stock market" appeared in Bruges, Belgium, specifically in the Van der Bursen family of bankers, in whose palace a securities market was organized. In 1460 the Antwerp Stock Exchange was created, which was the first stock market institution in the modern sense. Subsequently, the London Stock Exchange was created in 1570, in 1595 that of Lyon, France and in 1792 that of New York, this being the first on the American continent. These were consolidated after the boom in public limited companies.
Primary Market
The Primary Market is characterized by the placement of new issues of securities on the market. This generally has no cost to the investor, since the brokerage commissions are recognized directly by the securities issuing companies.
Secondary market
The Secondary Market comprises the set of transactions through which ownership of previously placed securities is transferred through the Primary Market. Its objective is to offer liquidity to the sellers of the securities, through the negotiation of the same before their expiration date. Generally, better yields can be obtained than in the Primary Market at the same terms and conditions. In this market, it is commonly the title seller who assumes the brokerage commissions.
What is the stock market ?.
It is a subsystem within the financial system and is made up of a set of financial instruments or assets, financial institutions or intermediaries whose mission is to contact buyers and sellers in the markets where the different financial instruments or assets are traded.
What functions does the bag fulfill ?.
- It connects companies with the people who save. It provides liquidity by creating a market for buying and selling. It allows small savers to access the capital of large companies. It serves as an index of the evolution of the economy. It determines the price of companies at through the listing. It provides protection against inflation, as it usually achieves higher returns than other investments.
What is the bag for?
In Ecuador, the Quito and Guayaquil stock exchanges, the main shareholder is the State, which issues state bonds that are very attractive to natural and / or legal investors, through this function, a large part of the works. So; the state issuing bonds captures money from the public and dedicates it to state works. It is also an entity that helps companies grow, contrasting interest with risk. An action on the stock market is also the securitization that is nothing more than the sale of ideas through dollars.
What and how is what is traded on the stock markets ?.
The contracting object is very broad and includes financial assets, gold, metals or other assets. Most of the activity of the exchanges focuses on financial assets and among these, transferable securities.
Depending on the income generated by the securities, they are divided into two main categories:
Fixed income securities, these securities represent an aliquot part of a loan to a private company, a public entity or the State.
Equity securities, which groups an aliquot part of the capital of a company (shares). Shareholders have special economic rights, different from bondholders.
What assets are traded on the stock exchange ?.
The most important are the following:
- Shares, Obligations, Bonds, Letters and promissory notes, Subscription rights, Investment Fund Participations, Subscription bonds, Treasury Letters, Public Debt, State Obligations.
Who can invest in the stock market ?.
From the legal point of view, securities can be bought and sold by all persons who have legal capacity to carry out sale and purchase contracts, whether they are natural or legal persons.
What is the BMV?
The Bolsa Mexicana de Valores, SA de CV is a private institution, which operates by concession of the Ministry of Finance and Public Credit, in accordance with the Securities Market Law. Its shareholders are exclusively authorized brokerage houses, which each own one share.
Features
The Mexican Stock Exchange (BMV), forum in which the operations of the organized stock market in Mexico are carried out, fulfills, among others, the following functions: to provide the infrastructure, supervision and services necessary to carry out the processes of issue, placement and exchange of securities and securities registered in the National Registry of Securities and Intermediaries (RNVI), and of other financial instruments; Make the stock information public; Perform the administrative management of the operations and transmit the respective information to SD Indeval; Supervise the activities of the issuing companies and brokerage houses, in terms of strict adherence to the applicable provisions; and promote the expansion and competitiveness of the Mexican stock market.
Companies that require resources (money) to finance their operation or expansion projects, can obtain it through the stock market, by issuing securities (shares, bonds, commercial paper, etc.) that are made available to investors (placed) and exchanged (bought and sold) in the BMV, in a market of free competition and with equal opportunities for all its participants.
Primary Market
To carry out the public offering (placement) of the securities, the company goes to a brokerage house that offers them (primary market) to the large investing public within the BMV. In this way, the issuers receive the resources corresponding to the securities that were acquired by the investors.
Secondary Market
Once securities are placed among investors in the stock market, they can be bought and sold (secondary market) in the BMV, through a brokerage house.
THE STOCK MARKET INDICES
What are they?
They are an Instrument of the Stock Markets to follow the evolution of all the listed shares. Most of the indices are made up of a selection of shares that are intended to represent the whole.
Stock indices are an increasingly important benchmark for portfolio managers. They are also in the offer of new products, especially in deposits and funds. There is more talk about them than about the markets they represent.
Are they all calculated the same?
No, some take the market capitalization (listed value by the number of shares) into account to assign to each security a weight within the index. Therefore, the rise or fall of a significant value has a greater impact on the index. This is the case of the IBEX 35 or the CAC 40 of the Paris Stock Exchange. In other cases such as the NIKKEI of the Tokyo Stock Exchange, the index is the result of an arithmetic sum of the evolution of the prices. In the latter case, the evolution of a large value will mean the same to the index as if it were a smaller one.
What are they for?
They are used to measure the behavior of the market they represent and compare it with the evolution of a given security or portfolio. Some have also been used for the creation of derived products.
The most important
The Standard & Poor's 500 is calculated using the capitalization-weighted arithmetic mean, made up of 500 representative companies.
The Dow Jones, made up of 30 industrial securities listed on the New York Stock Exchange (NYSE) which is calculated using the simple arithmetic price measure.
Japan
Topix, made up of 1,250 companies, is constructed on a capitalization-weighted arithmetic mean.
Nikei Stoch Averange, includes 225 companies and is calculated by a simple arithmetic mean.
United Kingdom
Finantial Times-30 (FT-ordinari) which has 30 English companies, the geometric mean is used to calculate it.
FT-SE 100 (Footsie) comprises the 100 largest companies in the London market and its index is calculated using a weighted arithmetic mean by capitalization.
Germany
Deutscher Aktfenindex (DAX) includes 30 securities listed in Frankfurt and is calculated by the weighted arithmetic mean by capitalization.
Spain
General Index of the Madrid Stock Exchange
The IBEX 35
Active Management or Passive Management
Many experts believe that in the more or less distant future, it will not be invested in securities, but in indices (in fact today through the Funds, this is partly what is done). Thus, many of the new financial products use various stock market indices around the world as a reference and link them to the profitability that the saver can obtain. Investors will probably only have to choose an index in the near future and consider whether they choose passive management of the chosen index or prefer active management. In the first case, it would be a matter of making a portfolio with the same index values and in amounts equal to their weight. With this we will achieve a profitability similar to that of the chosen index, to which only management costs would have to be discounted. In the second case,it would be a matter of betting on a portfolio that beats the profitability of the index, without subjecting ourselves to greater risks. A difficult bet to achieve on certain occasions and logically with higher management costs.
What is it?
It is an index that began to be published in January 1991, although its history began in 87 with the name of Fixx. As its number indicates, it is made up of 35 selected securities, from the Madrid Stock Exchange, among which it has the highest market capitalization and trading volume. It is reviewed every six months.
How is it calculated?
In this case it is not the arithmetic mean of the evolution of the 35 values that compose it.
To determine the weight of each security in the index, the floating capital (“frree float”) of each security is taken into account and not its market capitalization.
The values of the Ibex whose free float is less than 50 percent, will be computed based on a decreasing scale that goes from 75 to 10 percent, and not by 100 percent as until then. Its base is 3000 fixed on December 31, 1989.
What is it for?
It is used to measure the behavior of the market and compare it with the evolution of a given security or portfolio. The Ibex 35 was also created to support contracts for derivative products (options and futures) on indexes.
Ibex-35 values and weighting
Note that the first five values weigh more than 60 percent of the Ibex 35. The evolution of the index depends on what they do, since among the other 30 they barely reach 40 percent.
Telefónica 24.77 Acesa 0.93 FCC 0.52
BBVA 15.86 Carrefour 0.89 Indra 0.52
BSCH 15.67 Acciona 0.83 NH Hoteles 0.52
REPSOL 8.06 Ferrovial 0.82 Gamesa 0.39
Endesa 5.96 Sogecable 0.77 Red Eléctrica 0.25
Iberdrola 4.50 Dragados 0.76 Telepizza 0.18
Popular 2.58 Zeltia 0.75 Picking Pack 0.1
Fenosa 1.99 TPI 0.66
Terra 1.85 Acerinox 0.65
Natural Gas 1.49 Alba 0.64
Altadis 1.38 Aceralia 0.60
Amadeus 1.33 Sol Melia 0.60
Telefonica Moviles 1.07 ACS 0.59
Bankinter 0.97 Haste 0.55
Review every six months
The Ibex 35 is reviewed every six months. Since its creation, almost half of the securities have been renewed, both due to the arrival of new titles and the merger of some of them. There is a Technical Advisory Committee, chaired by the head of the Madrid Stock Market Research Service, which is the one that analyzes the exit and entry of securities from the index. This committee takes several factors into account when incorporating a new value: good representation in terms of market capitalization and trading volume; Securities with a sufficient number of shares in the market so that the market capitalization of the index allows a hedging strategy and arbitration in the market for derivatives on the Ibex 35. Incorporation into this index usually entails an increase in trading immediately before occur,since many managers have to buy titles of each and every one of the values that compose it to replicate the Ibex 35 (we saw it in “active management or passive management”).
However, the first days of release in this index are usually bearish in the price of this value. It is true that the expectation of entry of a certain value in the Ibex 35 also usually involves a bullish movement (Do you remember a saying that I usually repeat quite often ?: Buy with the rumor, sell with the news).
What is it?
The Dow Jones Index of Industrial Securities began publication on May 26, 1896 and includes the most important stocks on the New York Stock Exchange. Originally it had 12 values, then it went to 20 and in 1928 it reached the current 30. The last change in its constitution was in March 1997, when banks and high-tech companies were entered.
How is it calculated?
Unlike the Ibex 35 and other indices, the Dow Jones does not take into account the market capitalization of its securities. And therefore, it does not give more value to the evolution of a title than to that of another. In 1896 it began to be calculated from the sum of the prices of the securities. Now the divisor is adjusted taking into account the division of the Nominal (“split”), the attributions of free shares…..
What is it for?
The capitalization of the securities that compose it represents approximately a quarter of Wall Street and it is understood that it is an obligatory reference to know the trend of other exchanges. In fact, the Dow Jones Industrial index marks the trend followed by the large stock markets, including the Spanish one.
If an index is a benchmark, the Dow Jones is quintessential.
Fun facts (The Stock Market and the Long Term)
* 100 points January 12, 1906
* 1,000 points
November 14, 1972
* 2,000 points
January 8, 1987
* 3,000 points
April 17, 1991
* 4,000 points February 23, 1995
* 6,000 points October 14, 1996
* 8,000 points July 16, 1997
* 10,000 points April 24, 1999
Highest level 11,733 (January 14, 2000)
Last Quote 11.015 (May 25, 2001)
The 30 values
The index does not take into account the weight of each value. The “weight” is the sum of all the quotations between the quotation of each security.
Value Weight Value Weight
Minnesota 6.99 Citigroup 3.04
IBM 6.82 JP Morgan Chase 2.89
Johnson 5.72 Du Pont 2.95
Exxon 5.13 Philip Morris 2.85
United Technologies 4.90 Eastsman kodak 2.78
Merck 4.34 Coca Cola 2.16
Microsoft 4.06 American Express 2.66
Boeing 3.93 Alcoa 2.52
Procter & Gamble 3.70 SBC Comunt 2.51
General Motors 3.28 International Paper 2.27
Caterpillar 3.25 Walt Disney 1.99
Wal mart Stores 3.09 Hewlett Packard 1.78
Home Depo 3.06 McDonald 1.76
Nonewell 3.06 Intel 1.71
General Electric 3.05 ATT 1.22
The way these trading indices operate
Dow jones industrials (dj)
It is an index made up of the thirty largest industrial companies admitted to trading on the New York Stock Exchange (NYSE). It is calculated using a simple arithmetic price average. Despite the small number of companies that compose it, the DJ has proven its usefulness as a reflection of the short-term market trend, showing itself, however, as an unreliable guide in the long term, insofar as it only reflects the evolution of the largest companies and without taking dividends into account.
What is the nasdaq?
The Nasdaq Stock Market was created in 1971, and was the first electronic stock market, becoming the model for developing markets worldwide. It is a virtual structure that allows the sale of shares and financial assets through computers. Today, almost 5,000 companies - including both small growing companies and many large companies whose names have become universally known - trade their securities under this electronic scheme.
Nasdaq's use of the most advanced communications and information technology and its system of "Market Makers" or creators of competitive markets, distinguish it from a conventional exchange. Investors no longer need to meet face-to-face to trade securities, and competition among Market Makers benefits investors. These "Market Makers" are Nasdaq-owned firms that buy and sell stocks instantly at the best buy and sell prices available through a vast computer network to which securities firms around the world are connected. These firms must meet some special capital requirements, as well as other strict rules and regulations. For example:
* Guarantee of execution of each order at the best possible price available.
* Commitment to buy and sell the securities for which they create markets.
* Obligation to publicly report the price and volume of each operation within 90 seconds.
Nasdaq companies cover the entire spectrum of the American economy, from industrial to transportation companies, with a strong representation of the world of computers and information technology.
Today, many well-known North American companies choose Nasdaq, including: Adobe Systems, Amazon.com, Microsoft, Cisco, Dell Computer Corporation, Costco Companies, Food Lion, Intel Corporation, Netscape Communications Corporation, Reuters Group, and Yahoo!
Like any stock market, the Nasdaq has several stock indices that represent the average market situation (they express the average value of listed shares in levels or percentages):
Nasdaq Composite Index
This index measures the market value of all American and foreign stocks listed on the Nasdaq Stock Market. It is elaborated by means of the weighted average of all the shares that are traded. The price variations of each security produce an increase or decrease in the index in proportion to its weight in the market. The Nasdaq Composite Index is made up of eight sub-indices corresponding to specific sectors: Banking, Biotechnology, IT, Finance, Industrial Companies, Insurance, Telecommunications and Transportation.
During the last year, the Nasdaq index has had sudden upward and downward movements. Until April of this year, the Nasdaq rose and rose and rose to record highs, driven by a speculative wave generated by the dot-com fever. This wave was inconsistent, since all the dotcoms went up simply because they were dotcoms, everyone who invested in this type of company was winning, and when an investor puts their money and they always win, they lose the investment discipline and the economic incentive for entrepreneurs. it is also negative.
Nikkei stock average
Includes 225 listed companies in the Japanese market. It is calculated by the same system as the DJ.
Topix
It is the most complete of the Japanese indices. It is calculated using the weighted arithmetic mean by capitalization of all the companies listed in the first section of the Tokyo Stock Exchange (about 1250). It has 33 sector indices.
FT - SE 100 (fotsie).
It is calculated using a weighted arithmetic mean by capitalization, and comprises the 100 largest companies listed on the London market. It serves as the underlying for options on the London Security Exchange and for futures on the LIFFE.
FT -30
It is an index on a selection of 30 English companies listed on the London Stock Exchange, and, like the Footsie, it is produced by the Financial Times. It is calculated using a geometric mean, which produces deviations in the long term.
DAX
It is the main indicator of the German market. It is calculated using the weighted arithmetic mean by capitalization of the 30 listed securities in Frankfurt with the highest capitalization and trading.
General Index of the Madrid Stock Exchange.
This is a price index that measures the profitability obtained by the variation in the share price, corrected for the effect of the expansions and dividends.
It is made up of a group of companies that belong to different sectors: banks and finance companies, electricity, food, construction, investment. Metal - metal, oil and chemical, communication and other industries, and services.
The composition of the general index is reviewed each year based on liquidity criteria and contracting frequency.
The IBEX 35.
It is the official continuous market index of the Spanish Stock Exchange, being calculated, published and disseminated in real time by the Sociedad de Bolsas, SA
The Ibex 35 is the official continuous market index of the Spanish Stock Exchange. They are the prices of the 35 most liquid companies in the market weighted by capitalization. That is, a company will have more weight in the formation of the index the higher its market capitalization. In this way, the Ibex 35 would reflect a portfolio made up of a number of shares of each company proportional to the capitalization of each one of them.
It is a capitalization-weighted index, made up of the 35 most liquid companies among those listed on the continuous market of the four Spanish stock exchanges.
The Ibex 35 was created on December 29, 1989, establishing for that day an index of 3000 points. That day, the General index of the Madrid Stock Exchange (IGBM) was 296.8%.
Although the IGBM is related to the nominal value of the shares that make it up, setting the Ibex index at 3000 does not have a mathematical reason. It was done simply because of the proportionality it had with the IGBM. It is therefore a data of exclusive reference, and therefore, it only makes sense to be compared between different sessions.
The Ibex 35 was born out of a double need:
Faithfully reflect the behavior of the Spanish equity market.
Serve as an underlying asset for trading options and futures. This will be one of the points that we will deal with later, to explain the arbitration and coverage mechanisms with index values and with the index itself.
Composition
According to the rules that govern the Sociedad de Bolsas, the Ibex 35 index is made up of the 35 securities listed in the Stock Market Interconnection System of the four Spanish Stock Exchanges that during the control period have the highest volume of trading in effective pesetas, discounting the volumes resulting from special operations. To these effects, Special operations are considered those that involve a change in the stable shareholding of a Company.
The control period of the values included in the index is considered:
Regarding ordinary revisions, the six-month interval counted from the seventh month prior to the start of the calendar semester.
Regarding extraordinary reviews, the one that the Technical Advisory Committee, on the proposal of the Index Manager, considers most representative. The functions of both figures will be detailed later.
Without prejudice to the general criteria of belonging to the Ibex 35, the Index Manager may, at any time. propose to the Technical Advisory Committee the exclusion - or non-inclusion - of the securities in which any of the following circumstances concur.
That much of its volume traded during the control period.
Has been hired by a single Company or Stock and Stock Agency, It has been done in a few transactions, It has been carried out for a period of time considered as not very representative for the Manager.
That its traded volume suffers a decrease such that the Manager considers that the liquidity of the security is seriously affected.
That it has been suspended from trading and trading for a period of time that the Manager considers significant enough.
ANNEXES
Price-Profit.- This index allows projecting how many periods (years) the investor will have to wait to recover his investment, if 100% of the company's annual profits are distributed. It is obtained by dividing the market price of the share for earnings per share; This earnings per share figure is obtained by dividing the net income of the last 12 months by the number of shares outstanding.
Price-book value.- This indicator compares the market price of the share with its registered book value. It is calculated by dividing the market price for the book value of the share; the book value of the share is equal to the company's equity divided by the number of shares outstanding.
Dividend-Price.- This return is given as a percentage, and represents the return that the investor has received through cash dividends that the company has distributed among its shareholders. Obtained by dividing the cash amount per share by the market price; This amount corresponds to the total of dividends distributed in the last 12 months.
Capitalization.- Represents the market price of the issuing company. Its formula is the last price in sucres multiplied by the number of shares outstanding.
Stock market presence.- Shows the frequency with which the stock has been traded during the wheels of the last year. It is calculated by dividing the number of wheels on which the stock was traded in the last 12 months by the number of total wheels in the same period. This presence is registered in the Stock Market where the issuer is more liquid.
Rotation index.- This index shows the frequency with which the shares of the same capital have been traded. The number of shares traded in the last year is divided by the number of shares outstanding. To calculate this index, the number of shares traded nationally is considered.
Last price.- It is the last official price quoted on the Stock Market where the issuer is more liquid.
Number of shares outstanding.- In order to convert the capital into a single nominal value, as long as the shares have the same rights, we first analyze which nominal value is more liquid. The less liquid ones are then converted into more liquid par value shares, and all are added together.
Rotation Index.- The number of shares traded and the number of shares outstanding correspond to the most liquid shares.
Stock market presence.- It contemplates the liquidity of the company, without observing the nominal value to which it corresponds.
Last price.- It is the last official price of the shares with the most liquid nominal value listed on the Stock Market where the issuer has the greatest presence.
Conclusions:
On July 25, 2002, a stock market game competition was held at the Universidad Técnica Particular de Loja, organized by our School of Economics, the ADE in conjunction with the Quito Stock Exchange, where the operation was learned more closely. from a bag.
This becomes very interesting because, just like the game in real life of a Stock Market, the difference is that in real life it is not recommended for cardiac patients, but it is recommended for risk lovers.
Lately the 7 plagues of Egypt seem to have taken over finances in the United States, in the first days of June the Dow Jones lost 100 points during the following days due to the distrust of investors about business practices, this induces to change Wall Street's way of operating to incentivize its investors.
Stock indices represent a fundamental tool in financial markets, both for their usefulness as market indicators and for their role as underlying assets in the trading of derivative products.
When the world's most powerful companies like Enron, Arthor, Anderson, Worldcom, Xerox, Vivandi, Merck (the list of financial scandals stretches out and seems endless), investors have trouble losing confidence and therefore not investing. shake the financial world and therefore other exchanges outside the United States.
Today, the stock market world has been transformed into a global and interconnected “continuous market”, where the course of each stock market affects to a greater or lesser degree, in the course of the others the progression of globalization turns the international stock market indexes into best instruments to avoid or anticipate surprises in the national stock markets.
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