It was thought back then that wall streeters managed

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Unformatted text preview: speculators and conniving Wall Street operators plied their trade. It was thought back then that Wall Streeters managed stock prices to make themselves better off at the expense of others. A lot of gossip surrounded what was and was not happening in the stock market. Dow devised the DJIA to convey some information about what was actually happening in the stock market. Before the DJIA, 432 Chapter 16 Stocks and Bonds people had a hard time figuring out whether the stock market, on average, was rising or falling. Instead, they only knew that a particular stock went up or down by so many cents or dollars. Dow decided to find an average price of a certain number of stocks (11) that he thought would largely mirror what was happening in the stock market as a whole. With this number, people could then have some sense of what the stock market was doing on any given day. Today, the DJIA consists of 30 stocks, which are widely held by individuals and institutional investors. See Exhibit 16-1. This list can and does change from time to time, as determined by the editors of the Wall Street Journal. You may think that the DJIA is computed by summing the prices of stocks and dividing by 30, but it is not quite that simple today. A special divisor is used to avoid distortions that can occur, such as companies splitting their stock shares. Exhibit 16-2 shows the Dow Jones Industrial Average during the period 1928 through June 2005. In addition to the DJIA, other prominent stock indices (beside the Dow) are cited in the United States. A few include the NASDAQ Composite, the Standard & Poor’s 500, the Russell 2000, and the Wilshire 5000. Other prominent stock indices around the world include the Hang Seng (in Hong Kong), the Bovespa (Brazil), IPC (Mexico), BSE 30 (India), CAC 40 (France), and so on. Different economic consulting firms attempt to find out what influences the Dow: What causes it to go up? What causes it to go down? According to many economists, the Dow is closely connected to changes in such things as consumer credit, business e...
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This document was uploaded on 01/16/2014.

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