Stock market indicators, Financial Management

Stock Market indicators:

Stock indices can be organized by weighting the sample of stocks. The stock indicators can be of four types: price-weighted average, volume-weighted average, unweighted or equal weighted price index and free-float market capitalization.

Price-Weighted Average
Price-weighted average is the arithmetic average of current prices. The Dow Jones Industrial Average (DJIA) is the most popular price-weighted average. DJIA is unique in the price weighted series rather than market capitalization weighted series. The component weightings are affected only by changes in the stocks' prices, in contrast with other indexes which give weightings that are affected by both price changes and changes in the number of shares outstanding. When the DJIA was initially created, its values were calculated by simply adding up the component stocks' prices and dividing by the number of components. The rise in stock prices in terms of percentage will have uneven impact on calculation of index giving more weightage to higher price stocks. Such that, a $1 appreciation in the price of a small stock of $10 and $1 appreciation of a stock of $100 will have same implication on the index movement even though their percentage of appreciation differ. Moreover, the market capitalization of companies has no influential role to play in calculation of the index.

Therefore, the DJIA is not the true indicator of US industrial economy and the stock market as a whole. Later, the practice of adjusting the divisor was initiated to smooth out the effects of stock splits and other corporate actions.

Two kinds of averages are used in constructing share price indices - arithmetic mean and the geometric mean. Between the two averages, the arithmetic mean is more widely used. However, before we evaluate these methods, it must be emphasized that the indices based on averages are not the same as the general averages.

 

Posted Date: 9/10/2012 6:25:25 AM | Location : United States







Related Discussions:- Stock market indicators, Assignment Help, Ask Question on Stock market indicators, Get Answer, Expert's Help, Stock market indicators Discussions

Write discussion on Stock market indicators
Your posts are moderated
Related Questions

differentiate between pricing and allocative efficincy

The following are extracts of the Income Statement and Balance Sheet for Umar plc. Extract Balance Sheet at 30 June 20X2               20X1 £'000  £'000                £

Determine the Significance of gearing on shareholders Significance of gearing on shareholders is financial risk for anun-geared and geared company. It means that there is a gre

Kenneth Su Gold Corp (KSGC) is considering the purchase of a new piece of machinery. The new machinery would cost $80,000. You are given the following facts: The new machine

State about the Audit plan contents 1. Report requirements and terms of reference. 2. A review of business and financial position, reviewing why changes had occurred in curr

1.  Discuss the various techniques of cash management for an efficient working capital Management. 2.  Discuss the MM Hypothesis of Capital structure and its importance in corpo

A factoring company has offered a one-year agreement with Glub Ltd to both manage its debtors and advanced 80 per cent of the value of all its invoices immediately a sale is invoi

Random Number Generation Since we have said that competitors' average price, quantity sold and cost behave in a random fashion but follow a normal distribution, if we want to d

A firm has $700 in inventory, $600 in fixed assets, $600 in accounts receivables, $800 in accounts payable, and $50 in cash. What is the amount of the present assets?