Eq1_Lecture - Equities: 3 part series overview How is stock...

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Week 2: Equity Markets 1 Stock Indices Types of stock indices Index construction Pricing effects Primary Equity Markets IPOs Underpricing Readings: S.C. Chapter 9 2/35 Roger Loh Equities: 3 part series overview ± How is stock market information summarized? { Understanding stock market indices ± Primary markets for equities { IPOs { Theories and underpricing ± Secondary market for equities { Markets and orders { SEOs, rights offering ± Mutual funds { Unit trusts, ETFs, hedge funds ± Special topic { Individual investors and stock markets 3/35 Roger Loh 4/35 Roger Loh Illustrative Eg: DJ industrial index ± On May 26, 1896, Charles Dow simply added up the prices of 11 stocks and divided this by 11. ± Formally: ± D 0 is known as the divisor. On May 26, 1896, it was 11. ± Over the years, the divisor changes to maintain continuity in the index. ± Find the divisor today: 0 1 D P I n i it t = = Index Changes Primary Eq. Mkts Index Method Dow Eg IPO theories
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5/35 Roger Loh 6/35 Roger Loh List of the 30 Dow stocks on 19Dec08 No. NAME Price MV (m) VOLUME 1 INTERNATIONAL BUS.MCHS. 83.52 112,206 13,099 2 EXXON MOBIL 75.02 381,600 68,481 3 CHEVRON 70.85 143,952 31,352 4 MCDONALDS 60.32 67,229 15,967 5 60.18 179,680 23,247 6 58.84 163,255 23,131 7 3M 56.62 39,235 7,537 8 WAL MART STORES 55.74 218,643 32,444 9 UNITED TECHNOLOGIES 51.37 48,833 12,120 10 COCA COLA 44.43 102,791 25,274 11 CATERPILLAR 42.69 25,752 13,272 12 BOEING 41.24 30,222 9,904 13 HEWLETT-PACKARD 35.4 85,533 22,116 14 VERIZON COMMUNICATIONS 33.19 94,276 27,739 15 30.32 113,165 55,697 16 28.56 60,381 26,622 17 28.12 165,711 48,657 18 KRAFT FOODS 26.67 39,182 19,801 19 E I DU PONT DE NEMOURS 25.6 23,100 15,113 20 HOME DEPOT 24.22 41,064 23,095 21 WALT DISNEY 22.43 41,519 21,134 22 AMERICAN EXPRESS 19.43 22,537 19,991 23 MICROSOFT 19.12 170,083 115,432 24 PFIZER 17.3 116,653 58,042 25 GENERAL ELECTRIC 16.5 164,265 136,372 26 INTEL 14.44 80,315 73,503 27 BANK OF AMERICA 13.8 69,243 104,080 28 ALCOA 9.7 7,763 29,021 29 CITIGROUP 7.02 38,256 202,618 30 GENERAL MOTORS 4.49 2,741 70,211 1077.13 = = = = ? 13 . 1077 0 30 1 D P I i it t Index Changes Primary Eq. Mkts Index Method Dow Eg IPO theories 7/35 Roger Loh Let’s Add Google to the Dow ± Let’s add Google to Dow. Google’s closing price is $310.17 ± New sum of prices = ± If we naively take { this will represents an increase of almost ___ points or ___%! However, since none of the stock prices of the original 30 stocks have changed, this is clearly wrong. 0 31 1 D P I i it t = = Index Changes Primary Eq. Mkts Index Method Dow Eg IPO theories 8/35 Roger Loh We should adjust the divisor ± Adjust divisor so that DJ index level is the same ± Use new divisor from now on. ± Other reasons that the divisor could change?
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Eq1_Lecture - Equities: 3 part series overview How is stock...

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