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Case study on dow  jones stock exchange and bse Case study on dow jones stock exchange and bse Document Transcript

  • K.E.S. SHROFF COLLEGE Page 2 CHAPTER-1 WHAT IS STOCK EXCHANGE? An exchange is an institution, organization, or association which hosts a market where stocks, bonds, options and futures, and commodities are traded. Buyers and sellers come together to trade during specific hours on business days. Exchanges impose rules and regulations on the firms and brokers that are involved with them. If a particular company is traded on an exchange, it is referred to as "listed". Companies that are not listed on a stock exchange are sold OTC (short for Over-The- Counter). Companies that have shares traded OTC are usually smaller and riskier because they do not meet the requirements to be listed on a stock exchange A stock exchange is a form of exchange which provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there is a central location at least for record keeping, but trade is increasingly less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of increased speed and reduced cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets are driven by various factors that, as in all free markets, affect the price of stocks (see stock valuation). There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the- counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities.
  • K.E.S. SHROFF COLLEGE Page 3 CHAPTER-2 NEW YORK STOCK EXCHANGE (UNITED STATES) The New York Stock Exchange, commonly referred to as the NYSE, is a stock exchange located at 11 Wall Street, Lower Manhattan, New York City, New York, United States. It is by far the world's largest stock exchange by market capitalization of its listed companies at US$14.242 trillion as of Dec 2011. Average daily trading value was approximately US$153 billion in 2008. The NYSE is operated by NYSE Euronext (NYSE: NYX), which was formed by the NYSE's 2007 merger with the fully electronic stock exchange Euronext. The NYSE trading floor is located at 11 Wall Street and is composed of four rooms used for the facilitation of trading. A fifth trading room, located at 30 Broad Street, was closed in February 2007. The main building, located at 18 Broad Street, between the corners of Wall Street and Exchange Place, was designated a National Historic Landmark in 1978, as was the 11 Wall Street building. Type Stock exchange Location New York City, New York, United States Founded March 8, 1817 Owner NYSE Euronext Currency United States dollar No. of listings 2,308 MarketCap US$ 14.242 trillion (Dec 2011) Volume US$ 20.161 trillion (Dec 2011) Indexes Dow Jones Industrial Average S&P 500 NYSE Composite Website
  • K.E.S. SHROFF COLLEGE Page 4 History The origin of the NYSE can be traced to May 17, 1792, when the Buttonwood Agreement was signed by 24stockbrokers outside of 68 Wall Street in New York under a buttonwood tree on Wall Street. On March 8, 1817, the organization drafted a constitution and renamed itself the "New York Stock & Exchange Board."Anthony Stockholm was elected the Exchange's first president. The first central location of the Exchange was a room, rented in 1792 for $200 a month, located at 40 Wall Street. After that location was destroyed in the Great Fire of New York in 1835, the Exchange moved to a temporary headquarters. In 1863, the New York Stock & Exchange Board changed to its current name, the New York Stock Exchange. In 1865, the Exchange moved to 10–12 Broad Street. The New York Stock Exchange was closed for ten days starting September 20, 1873, because of the Panic of 1873. The volume of stocks traded increased sixfold in the years between 1896 and 1901, and a larger space was required to conduct business in the expanding marketplace. Eight New York City architects were invited to participate in a design competition for a new building; ultimately, the Exchange selected the neoclassic designsubmitted by architect George B. Post. Demolition of the Exchange building at 10 Broad Street, and adjacent buildings, started on May 10, 1901. The new building, located at 18 Broad Street, cost $4 million and opened on April 22, 1903. The trading floor, at 109 × 140 feet (33 × 42.5 m), was one of the largest volumes of space in the city at the time, and had a skylight set into a 72-foot (22 m)-high ceiling. The main façade of the building features six tall columns with Corinthian capitals, topped by a marble pediment containing high-relief sculptures by John Quincy Adams Ward with the collaboration of Paul Wayland Bartlett, carved by the Piccirilli Brothers, representing Integrity Protecting the Works of Man. The building was listed as a National Historic Landmark and added to the National Register of Historic Places on June 2, 1978. In 1922, a building for offices, designed by Trowbridge & Livingston, was added at 11 Wall Street, as well as a new trading floor called the Garage. Additional trading floor space was added in 1969 the Blue Room, and in 1988 the EBR or Extended Blue Room, with the latest technology for information display and communication. Yet another trading floor was opened at 30 Broad Street called the Bond Room in 2000. As the NYSE introduced its hybrid market, a greater proportion of trading came to be executed electronically, and due to the resulting reduction in demand for trading floor space, the NYSE decided to close the 30 Broad Street trading room in early 2006. As the adoption of electronic trading continued to reduce the number of traders and employees on the floor, in late 2007, the NYSE closed the rooms created by the 1969 and 1988 expansions. The Stock Exchange Luncheon Club was situated on the seventh floor from 1898 until its closure in 2006.
  • K.E.S. SHROFF COLLEGE Page 5 The NYSE announced its plans to merge with Archipelago on April 21, 2005, in a deal intended to reorganize the NYSE as a publicly traded company. NYSE's governing board voted to merge with rival Archipelago on December 6, 2005, and become a for-profit, public company. It began trading under the name NYSE Group on March 8, 2006. A little over one year later, on April 4, 2007, the NYSE Group completed its merger with Euronext, the European combined stock market, thus forming the NYSE Euronext, the first transatlantic stock exchange. Presently, Marsh Carter is Chairman of the New York Stock Exchange, having succeeded John S. Reedand the CEO is Duncan Niederauer, having succeeded John Thain. Rule 80B of NYSE A rule on the New York Stock Exchange mandating that trades stop for a certain amount of time if the Dow Jones Industrial Average falls 10%, 20%, or 30% in a single trading day. This measure is designed to prevent panic selling by stopping trading after a security or an indexhas fallen by a certain amount. For example, if the Dow Jones Industrial Average falls 10% in a trading day, the New York Stock Exchange suspends trade for at least one hour. Rule 80B is intended to allow investors to determine whether a situation is really as bad as it looks
  • K.E.S. SHROFF COLLEGE Page 6 Notable Events The exchange was closed shortly after the beginning of World War I (July 31, 1914), but it partially re-opened on November 28 of that year in order to help the war effort by trading bonds, and completely reopened for stock trading in mid-December. On September 16, 1920, a bomb exploded on Wall Street outside the NYSE building, killing 33 people and injuring more than 400. The perpetrators were never found. The NYSE building and some buildings nearby, such as the JP Morgan building, still have marks on their façades caused by the bombing. The Black Thursday crash of the Exchange on October 24, 1929, and the sell-off panic which started on Black Tuesday, October 29, are often blamed for precipitating the Great Depression of 1929. In an effort to try to restore investor confidence, the Exchange unveiled a fifteen-point program aimed to upgrade protection for the investing public on October 31, 1938. On October 1, 1934, the exchange was registered as a national securities exchange with the U.S. Securities and Exchange Commission, with a president and a thirty-three member board. On February 18, 1971 the non-profit corporation was formed, and the number of board members was reduced to twenty-five. One of Abbie Hoffman's well-known publicity stunts took place in 1967, when he led members of the Yippie movement to the Exchange's gallery. The provocateurs hurled fistfuls of real dollars mixed with fake dollars toward the trading floor below. Some traders booed, and some collected the apparent bounty.The press was quick to respond and, by evening, the event had been reported around the world. (The stock exchange later spent $20,000 to enclose the gallery with bulletproof glass.) Hoffman wrote a decade later, "We didn’t call the press; at that time we really had no notion of anything called a media event. On October 19, 1987, the Dow Jones Industrial Average (DJIA) dropped 508 points, a 22.6% loss in a single day, the second-biggest one-day drop the exchange had experienced, prompting officials at the exchange to invoke for the first time the "circuit breaker" rule to halt all trading. This was a very controversial move and led to a quick change in the rule; trading now halts for an hour, two hours, or the rest of the day when the DJIA drops 10, 20, or 30 percent, respectively. The rationale behind the trading halt was to give investors a chance to cool off and reevaluate their positions. Black Monday was followed by Terrible Tuesday, a day in which the Exchange's systems did not perform well and some people had difficulty completing their trades. Consequently, there was another major drop for the Dow on October 13, 1989; the Mini- Crash of 1989. The crash was apparently caused by a reaction to a news story of a $6.75 billion leveraged buyout deal for UAL Corporation, the parent company of United Airlines, which broke down. When the UAL deal fell through, it helped trigger the collapse of the junk bond market causing the Dow to fall 190.58 points, or 6.91 percent. Similarly, there was a panic in the financial world during the year of 1997; the Asian Financial Crisis. Like the fall of many foreign markets, the Dow suffered a 7.18% drop in value (554.26 points) on October 27, 1997, in what later became known as the 1997 Mini- Crash but from which the DJIA recovered quickly.
  • K.E.S. SHROFF COLLEGE Page 7 On January 26, 2000, an altercation during filming of the music video for "Sleep Now in the Fire", which was directed by Michael Moore, caused the doors of the exchange to be closed and the band Rage Against the Machine to be escorted from the site by security after band members attempted to gain entry into the exchange. Trading on the exchange floor, however, continued uninterrupted. On May 6, 2010, the Dow Jones Industrial Average posted its largest intraday percentage drop since the October 19, 1987 crash, with a 998 point loss later being called the Flash Crash (as the drop occurred in minutes before rebounding). The SEC and CFTC published a report on the event, although it did not come to a conclusion as to the cause. The regulators found no evidence that the fall was caused by erroneous ("fat finger") orders.
  • K.E.S. SHROFF COLLEGE Page 8 Trading The New York Stock Exchange (sometimes referred to as "the Big Board") provides a means for buyers and sellers to trade shares of stock in companies registered for public trading. The NYSE is open for trading Monday through Friday from 9:30 am – 4:00 pm ET, with the exception of holidays declared by the Exchange in advance. On the trading floor, the NYSE trades in a continuous auction format, where traders can execute stock transactions on behalf of investors. They will gather around the appropriate post where a specialist broker, who is employed by an NYSE member firm (that is, he/she is not an employee of the New York Stock Exchange), acts as an auctioneer in an open outcry auction market environment to bring buyers and sellers together and to manage the actual auction. They do on occasion (approximately 10% of the time) facilitate the trades by committing their own capital and as a matter of course disseminate information to the crowd that helps to bring buyers and sellers together. The auction process moved toward automation in 1995 through the use of wireless hand held computers (HHC). The system enabled traders to receive and execute orders electronically via wireless transmission. On September 25, 1995, NYSE member Michael Einersen, who designed and developed this system, executed 1000 shares of IBM through this HHC ending a 203 year process of paper transactions and ushering in an era ofautomated trading. As of January 24, 2007, all NYSE stocks can be traded via its electronic Hybrid Market (except for a small group of very high-priced stocks). Customers can now send orders for immediate electronic execution, or route orders to the floor for trade in the auction market. In the first three months of 2007, in excess of 82% of all order volume was delivered to the floor electronically. NYSE works with US regulators like the SEC and CFTC to coordinate risk management measures in the electronic trading environment through the implementation of mechanisms like circuit breakers and liquidity replenishment points. Until 2005, the right to directly trade shares on the exchange was conferred upon owners of the 1366 "seats". The term comes from the fact that up until the 1870s NYSE members sat in chairs to trade. In 1868, the number of seats was fixed at 533, and this number was increased several times over the years. In 1953, the number of seats was set at 1,366. These seats were a sought-after commodity as they conferred the ability to directly trade stock on the NYSE, and seat holders were commonly referred to as members of the NYSE. The Barnes family is the only known lineage to have five generations of NYSE members: Winthrop H. Barnes (admitted 1894), Richard W.P. Barnes (admitted 1926), Richard S. Barnes (admitted 1951), Robert H. Barnes (admitted 1972), Derek J. Barnes (admitted 2003). Seat prices varied widely over the years, generally falling during recessions and rising during economic expansions. The most expensive inflation-adjusted seat was sold in 1929 for $625,000, which, today, would be over six million dollars. In recent times, seats have sold for as high as $4 million in the late 1990s and as low as $1 million in 2001. In 2005, seat prices shot up to $3.25 million as the exchange entered into an agreement to merge with Archipelago and become a for-profit, publicly traded company. Seat owners received $500,000 in cash per seat and 77,000 shares of the newly formed corporation. The NYSE now sells one-year licenses to trade directly on the exchange. Licences for floor trading are available for $40,000 and a licence for bond trading is available for as little as $1,000 as of 2010. Neither are resell-able, but may be transferable in during the change of ownership of a cooperation holding a trading licence.
  • K.E.S. SHROFF COLLEGE Page 9 NYSE Composite Index In the mid-1960s, the NYSE Composite Index (NYSE: NYA) was created, with a base value of 50 points equal to the 1965 yearly close. This was done to reflect the value of all stocks trading at the exchange instead of just the 30 stocks included in the Dow Jones Industrial Average. To raise the profile of the composite index, in 2003 the NYSE set its new base value of 5,000 points equal to the 2002 yearly close. Timeline In 1792, The NYSE acquires its first traded securities. In 1817, The constitution of the New York Stock and Exchange Board is adopted.[25] In 1867, The First Stock Ticker. In 1896, Dow Jones Industrial Average first published in The Wall Street Journal. In 1903, NYSE moves into new quarters at 18 Broad Street. In 1906, Dow exceeds 100 on January 12. In 1907, Panic of 1907. In 1914, World War I causes the longest exchange shutdown: four months, two weeks; re-opening December 12 brings the largest one-day percentage drop in the DJIA (24.4%). In 1915, Market price is given in dollars. In 1929, Central quote system established; Black Thursday, October 24 and Black Tuesday, October 29 signal the end of the Roaring Twenties bull market. In 1943, Trading floor is opened to women. In 1949, Longest (eight-year) bull market begins. In 1954, Dow surpasses its 1929 peak in inflation-adjusted dollars. In 1956, Dow closes above 500 for the first time on March 12. In 1966, the NYSE begins a composite index of all listed common stocks. This is referred to as the "Common Stock Index" and is transmitted daily. The starting point of the index is 50. It is later renamed the NYSE Composite Index. In 1967, Protesters led by Abbie Hoffman throw mostly fake dollar bills at traders from gallery, leading to the installation of bullet-proof glass. In 1970, Securities Investor Protection Corporation established. In 1971, NYSE recognized as Not-for-Profit organization. In 1972, Dow closes above 1,000 for the first time on November 14. In 1977, Foreign brokers are admitted to NYSE. In 1980, New York Futures Exchange established. In 1982, Longest bull market in DJIA history begins. In 1987, Black Monday, October 19, sees the second-largest one-day DJIA percentage drop (22.6%) in history. In 1991, Dow exceeds 3,000. In 1995, Dow exceeds 5,000. In 1996, Real-time ticker introduced. In 1999, Dow exceeds 10,000 on March 29. In 2000, Dow peaks at 11,722.98 on January 14; first NYSE global index is launched under the ticker NYIID. In 2001, Trading in fractions (n/16) ends, replaced by decimals (increments of $.01, see Decimalization). When the September 11, 2001 attacks occur, the NYSE was closed for 4 sessions. In 2003, NYSE Composite Index relaunched and value set equal to 5,000 points. In 2006, NYSE and ArcaEx merge, creatingNYSE Arca and forming the publicly owned, for- profit NYSE Group, Inc.; in turn, NYSE Group merges withEuronext, creating the first trans- Atlantic stock exchange group; DJIA tops 12,000 on October 19. In 2007, US President George W. Bush shows up unannounced to the Floor about an hour and a half before a Federal Open Market Committee interest-rate decision on January 31. NYSE announces its merger with theAmerican Stock Exchange; NYSE Composite closes above 10,000 on June 1; DJIA exceeds 14,000 on July 19 and closes at an all time peak of 14,164.53 on October 9. This was the peak before the 2008–2009 bust.
  • K.E.S. SHROFF COLLEGE Page 10 On September 15, 2008, the DJIA loses more than 500 points amid fears of bank failures, resulting in a permanent prohibition of naked short selling and a three-week temporary ban on all short selling of financial stocks; in spite of this, record volatility continues for the next two months, culminating at 5½-year market lows. In 2009, Dow closes at 6547.05 on March 9 reaching a 12 year low. Returns to 10,015.86 on October 14. Derailed planned merger with Deutsche Börse On February 15, 2011 NYSE and Deutsche Börse announced their merger to form a new company, as yet unnamed, wherein Deutsche Börse shareholders will have 60% ownership of the new entity, and NYSE Euronext shareholders will have 40%. On February 1, 2012, the European Commission blocked the merger of NYSE with Deutsche Börse, after commissioner Joaquin Almunia stated that the merger "would have led to a near- monopoly in European financial derivatives worldwide". Instead, Deutsche Börse and NYSE will have to sell either their Eurex derivatives or LIFFE shares in order to not create a monopoly. On February 2, 2012, NYSE Euronext and Deutsche Börse agreed with strong opposition by the EU for the planned merger, to scrap the merger. Trading schedule Regular trading hours are from 9:30 am to 4:00 pm Eastern Time
  • K.E.S. SHROFF COLLEGE Page 11 CHAPTER-3 WHAT IS THE DOW JONES STOCK EXCHANGE (WALLSTREETWINDOW) When you think of the Dow Jones Stock Exchange you are probably thinking about the most popular and widely followed index of stocks. The Dow Jones Industrial average tracks a basket of the thirty largest companies that trade on the New York Stock Exchange. There really isn't a "Dow Jones Stock Exchange" in the sense of a place where Dow Jones stocks exclusively trade, because all Dow Jones stocks trade on the New York Stock Exchange, home to more than 2,8000 companies that trade over a billion share every single day. The Dow Jones Industrial Average is probably what you are thinking of when you typed in "Dow Jones Stock Exchange." The DOW average - or DOW 30 - consists of 30 stocks. It was created by the editor of the Wall Street Journal named Charles Dow back in the late 1800's. It is the second oldest market index after the Dow Jones Transportation Average which at first consisted of mainly railroad stocks. The Dow Jones Industrial Average is computed by taking the price of the 30 largest public companies in the United States. Not all of the mare in heavy industry. Some are banks and some are computer companies like Microsft and Intel - but all are the biggest companies in the United States and even in the world. McDonald's for instance is in the DOW and so is Wal-Mart. The industrial name comes from history when the DOW 30 average was first made every company on it had something to do with industry or manufacturing. Most were conglomerates. Companies are often added and dropped from the DOW as they change in size. In June, 2009 for example GM and Citigroup got dropped and replaced by The Travelers Companies and Cisco systems. Many fortunes have been made by investing in the DOW 30 stocks.
  • K.E.S. SHROFF COLLEGE Page 12 Dow jones golden crossover indexes Introduction The Dow Jones Golden Crossover Indexes are designed to act as an informational tool to help manage systematic risk exposure. The indexes utilize a ―moving average crossover system," which reallocates the weights of the two index components between an underlying equity index and a cash index over time. By directly incorporating systematic risk considerations, the Dow Jones Golden Crossover Indexes provide an informational tool that may help manage the most significant risk that cannot be mitigated by diversification alone. The Dow Jones Golden Crossover Indexes use a particular moving average crossover system to identify two potential distinct market events, or ―signals‖—the Golden Cross and the Dead Cross—which indicate when the indexes will begin adjusting their exposures (or)weights).The Golden Cross occurs when the 50-day moving average of the closing prices of the underlying index crosses above the 200-day moving average. This event is considered by some to indicate the end of a ―down‖ trend and the start of the new ―up‖ trend (i.e., a good‖ market condition) .The Dead Cross occurs when the 50-day moving average of the closing prices of the underlying index crosses below the 200-day moving average. This event is considered by some to indicate the end of the ―up‖ trend and the start of the new ―down‖ trend (i.e., a ―bad‖ market condition). Moving average crossover systems are best suited for trend identification and trend-following purposes, not for prediction.
  • K.E.S. SHROFF COLLEGE Page 13 CHAPTER-4 DOW JONES INDUSTRIAL AVERAGE The Dow Jones Industrial Average also called the Industrial Average, the Dow Jones, the Dow Jones Industrial, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co- founder Charles Dow. It was founded on May 26, 1896, and is now owned by Dow Jones Indexes, which has its majority owned by the CME Group. The average is named after Dow and one of his business associates, statistician Edward Jones. It is an index that shows how 30 large publicly owned companies based in the United States have traded during a standard trading session in the stock market. It is the second oldest U.S. market index after the Dow Jones Transportation Average, which was also created by Dow. The Industrial portion of the name is largely historical, as many of the modern 30 components have little or nothing to do with traditional heavy industry. The average is price- weighted, and to compensate for the effects of stock splits and other adjustments, it is currently a scaled average. The value of the Dow is not the actual average of the prices of its component stocks, but rather the sum of the component prices divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, so as to generate a consistent value for the index. Along with the NASDAQ Composite, the S&P 500 Index, and the Russell 2000 Index, the Dow is among the most closely watched U.S. benchmark indices tracking targeted stock market activity. Although Dow compiled the index to gauge the performance of the industrial sector within the American economy, the index's performance continues to be influenced by not only corporate and economic reports, but also by domestic and foreign political events such as war and terrorism, as well as by natural disasters that could potentially lead to economic harm. Components of the Dow trade on both theNASDAQ OMX and the NYSE Euronext, two of the largest stock market companies. Derivatives of the Dow trade on theChicago Board Options Exchange and through the CME Group, the world's largest futures exchange company, which owns 90% of the indexing business founded by Dow Jones, including the Industrial Average.
  • K.E.S. SHROFF COLLEGE Page 14 Former Components The components of the DJIA have changed 48 times in its 116 year history. As of 2011, General Electric has had the longest continuous presence on the index, with its latest addition being in 1907. A summary of the more recent changes to the index includes the following: On February 19, 2008, Chevron and Bank of America replaced Altria Group and Honeywell. Chevron was previously a Dow component from July 18, 1930, to November 1, 1999. During Chevron's absence, its split-adjusted price per share went from forty-four dollars to eighty-five, while the price of petroleum rose from twenty-four dollars to a hundred. On September 22, 2008, Kraft Foods replaced the American International Group (AIG) in the index. On June 8, 2009, General Motors and Citigroup were replaced by The Travelers Companies and Cisco Systems, which became the third company traded on the NASDAQ to be part of the Dow. History Early years The Dow Jones Industrial Average was founded by Charles Dow on May 26, 1896, and represented the dollar average of 12 stocks from leading American industries. Previously in 1884, Dow had composed an initial stock average called the Dow Jones Averages, which contained nine railroads and two industrial companies that appeared in the Customer's Afternoon Letter, a daily two-page financial news bulletin which was the precursor to The Wall Street Journal. The original group of 12 stocks ultimately chosen to form the Dow Jones Industrial Average did not contain any railroad stocks, but purely industrial stocks. Of these, only General Electric currently remains part of that index. The other 11 were: American Cotton Oil Company, a predecessor company to Bestfoods, now part of Unilever. American Sugar Company, became Domino Sugar in 1900, now Domino Foods, Inc. American Tobacco Company, broken up in a 1911 antitrust action. Chicago Gas Company, bought by Peoples Gas Light in 1897, now an operating subsidiary of Integrys Energy Group. Distilling & Cattle Feeding Company, now Millennium Chemicals, formerly a division of LyondellBasell, the latter of which recently emerged fromChapter 11 bankruptcy.
  • K.E.S. SHROFF COLLEGE Page 15 Laclede Gas Company, still in operation as the Laclede Group, Inc., removed from the Dow Jones Industrial Average in 1899. National Lead Company, now NL Industries, removed from the Dow Jones Industrial Average in 1916. North American Company, an electric utility holding company, broken up by the U.S. Securities and Exchange Commission (SEC) in 1946. Tennessee Coal, Iron and Railroad Company in Birmingham, Alabama, bought by U.S. Steel in 1907; U.S. Steel was removed from the Dow Jones Industrial Average in 1991. U.S. Leather Company, dissolved in 1952. United States Rubber Company, changed its name to Uniroyal in 1961, merged with private B.F. Goodrich in 1986, bought by Michelin in 1990. When it was first published in the late 1890s, the index stood at a level of 40.94, but ended up hitting its all-time low of 28.48 during the summer of 1896 during the depths of what later became known as the Panic of 1896. Many of the biggest percentage price moves in the Dow occurred early in its history, as the nascent industrial economy matured. A brief war in 1898 between the U.S. and the Spanish Empire might have only had a minor impact in the Dow's direction. The first decade of the 1900s would see the Dow halt its momentum as it worked its way through a pair of cataclysmic financial crises; the Panic of 1901 and the Panic of 1907. The Dow would be stuck in a trading range of between the 50 and 100 point levels until late 1909. The negativity surrounding the 1906 San Francisco earthquake did little to improve the economic climate. International disturbances such as the Russo-Japanese War were few and far between and seemed to have little if any influence on the Dow. The average finished the decade in the vicinity of the 100 point level. At the start of the 1910s, the decade would begin with the Panic of 1910–1911 stifling economic growth for a lengthy period of time. History would later take its course on July 30, 1914; as the average stood at a level of 71.42 when a decision was made to close down the New York Stock Exchange, and suspend trading for a span of four and a half months. Some historians believe the exchange closed because of a concern that markets would plunge as a result of panic over the onset of World War I. An alternative explanation is that the Secretary of the Treasury, William Gibbs McAdoo, closed the exchange because he wanted to conserve the U.S. gold stock in order to launch the Federal Reserve System later that year, with enough gold to keep the U.S. at par with thegold standard. When the markets reopened on December 12, 1914, the index closed at 54, a drop of 24.39%.[12] Also, in trying to explain the huge percentage drop, there was a new recalculation performed on the index in September 1916. Additions to the index raised the number of companies to 20, resulting in a mathematical inconsistency to the average from previous years, including 1914.
  • K.E.S. SHROFF COLLEGE Page 16 Following World War I, the U.S. would experience another downturn in economic activity in what became known as the Post-World War I recession. The Dow's performance would remain virtually unchanged from the closing value of the previous decade, adding only around 5%, from about the 100 level to 105. During the 1920s, specifically in 1928, the components of the Dow were increased to 30 stocks near the economic height of that decade, which was nicknamed the Roaring Twenties. The prosperous nature of the economic climate, muted the negative influence of an early 1920s recession plus certain international conflicts such as the Polish-Soviet war, the Irish Civil War, theTurkish War of Independence and the initial phase of the Chinese Civil War. The Crash of 1929 in October and the ensuing Great Depression over the next several years returned the average to its starting point, almost 90% below its peak. By July 8, 1932, following its intra-day low of 40.56, the Dow would end up closing the session at 41.22. The high of 381.17 on September 3, 1929, would not be surpassed until 1954, in inflation-adjusted numbers. However, the bottom of the 1929 Crash came just 2½ months later on November 13, 1929, when intra-day it was at the 195.35 level, closing slightly higher at 198.69. For the decade, the Dow would end off with a healthy 173% gain from around the 105 level in 1920 in to a level of 286 in 1929 before the Crash. Marked by global instability and the Great Depression, the 1930s contended with several consequential European and Asian outbreaks of war, leading up to catastrophic World War II in 1939. Other conflicts during the decade which affected the stock market included the 1936-1939 Spanish Civil War, the 1935-1936 Second Italo-Abyssinian War, the Soviet- Japanese Border War of 1939 and the Second Sino-Japanese War from 1937. On top of that, the U.S. dealt with a painful recession in 1937 and 1938 which temporarily brought economic recovery to a halt. The largest one-day percentage gain in the index, 15.34%, happened on March 15, 1933, in the depths of the 1930s bear market when the Dow gained 8.26 points to close at 62.10. However, as a whole throughout the Great Depression, the Dow posted some of its worst performances, for a negative return during most of the 1930s for new and old stock market investors. From 1935 to 1940, the Dow Jones average was down from around the 286 level during the late 1920s, to a stable level of 148, a loss of about 48%. Dot-Com boom The 1990s brought on rapid advances in technology along with the introduction of the dot- com era. To start off, the markets contended with the 1990 oil price shock compounded with the effects of the Early 1990s recession and a brief European situation surrounding Black Wednesday. Certain influential foreign conflicts such as the 1991 Soviet coup d'état attempt which took place as part of the initial stages of the Dissolution of the USSR and the Fall of Communism; the First and Second Chechen Wars, the Persian Gulf War and the Yugoslav Wars failed to dampen economic enthusiasm surrounding the ongoing Information Age and the "Irrational Exuberance" (a phrase coined by Alan Greenspan) of the Internet Boom. Even the occurrences of the Rwandan Genocideand the Second Congo War, termed as "Africa's World War" that involved 8 separate African nations which together between the two killed over 5 million people; didn't seem to have any noticeable negative financial impact on the Dow either. Between late 1992 and early 1993, the Dow staggered through the 3,000 level making only modest gains as the Biotechnology sector suffered through the downfall of the Biotech Bubble; as many biotech companies saw their share prices rapidly rise to record levels and then subsequently fall to new all-time lows.
  • K.E.S. SHROFF COLLEGE Page 17 A linear chart of the Wilshire 5000 which approximates the shape of the rise in the DJIA during the 1990s acceleration. The full-cap Wilshire rose from a trading low of under 4,000 in 1990 to above the 12,000 mark in the year 2000 with intermittent pullbacks throughout the decade. On November 21, 1995, the DJIA closed above the 5,000 level (5,023.55) for the first time. Over the following two years, the Dow would rapidly tower above the 6,000 level during the month of October in 1996, and the 7,000 level in February 1997. On its march higher into record territory, the Dow easily made its way through the 8,000 level in July 1997. However, later in that year during October, the events surrounding the Asian Financial Crisisplunged the Dow into a 554 point loss to a close of 7,161.15; a retrenchment of 7.18% in what became known as the 1997 Mini-Crash. Although internationally there was negativity surrounding the 1998 Russian financial crisis, the Dow would go on to surpass the 9,000 level during the month of April in 1998, making its sentimental push towards the symbolic 10,000 level. On March 29, 1999, the average closed above the 10,000 mark (10,006.78) after flirting with it for two weeks. This prompted a celebration on the trading floor, complete with party hats. The scene at the exchange made front page headlines on many U.S. newspapers such as The New York Times. On May 3, 1999, the Dow achieved its first close above the 11,000 mark (11,014.70). Total gains for the decade exceeded 315%; from the 2,753 level to 11,497. The Dow averaged a 5.3% return compounded annually for the 20th century, a record Warren Buffett called "a wonderful century"; when he calculated that to achieve that return again, the index would need to close at about 2,000,000 by December 2099.[15] Even during the height of the dot-com era, authors James K. Glassman and Kevin A. Hassett went so far as to publish a book entitled Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market. Their theory was to imply that stocks were still cheap and it was not too late to benefit from rising prices during the Internet boom. Characterized by fear on the part of newer investors, the uncertainty of the 2000s (decade) brought on a significant bear market. There was indecision on whether the cyclical bull market represented a prolonged temporary bounce or a new long-term trend. Ultimately, there was widespread resignation and disappointment as the lows were revisited, and in some cases, surpassed near the end of the decade.
  • K.E.S. SHROFF COLLEGE Page 18 Late-2000s (decade) recession On September 15, 2008, a wider financial crisis became evident when Lehman Brothers filed for Chapter 11 bankruptcy along with the economic effect of record high oil prices which reached almost $150 per barrel two months earlier. On that day, the DJIA lost more than 500 points for only the sixth time in history, returning to its mid-July lows below the 11,000 level. A series of "bailout" packages, including the Emergency Economic Stabilization Act of 2008, proposed and implemented by the Federal Reserve and U.S. Treasury, as well as FDIC- sponsored bank mergers, did not prevent further losses. After nearly six months of extreme volatility during which the Dow experienced its largest one day point loss, largest daily point gain, and largest intra-day range (more than 1,000 points), the index closed at a new twelve- year low of 6,547.05 on March 9, 2009 (after an intra-day low of 6,469.95[20] during the March 6 session), its lowest close since April 1997, and had lost 20% of its value in only six weeks. Towards the latter half of 2009, the average rallied towards the 10,000 level amid optimism that the Late-2000s (decade) Recession, theUnited States Housing Bubble and the Global Financial Crisis of 2008–2009, were easing and possibly coming to an end. For the decade, the Dow saw a rather substantial pullback for a negative return from the 11,497 level to 10,428, a loss of a little over 9%. Early-2010s cyclical advance During the early part of the 2010s, aided by loose monetary policy, the Dow made a notable rally attempt, though with significant volatility due to growing global concerns such as the 2010 European sovereign debt crisis, the Dubai debt crisis, and the United States debt ceiling crisis. On May 6, 2010, just after 2:30 pm EDT, the Dow Jones Industrial Average plunged by 998.50 points, its largest intra-day point decline ever, representing an intra-day loss of 9.2%. The event, during which the Dow bottomed out at 9,869 before recovering to end with a 3.2% daily loss at 10,520.32, became known as the 2010 Flash Crash.[21][21] On February 1, 2011, the Dow settled at the 12,040.16 level, reaching past the 12,000 mark for the first time in over two and a half years.[22] The index peaked above 12,800 shortly before a severe correction surrounding the U.S. Sovereign debt downgrade by Standard & Poor's to AA+ from AAA on August 8. On that day, the Dow plummeted 634.76 points to close at 10,809.85, its first close under 11,000 since November 2010.[23] A renewed bear market was averted due in large part to further Federal Reserve monetary easing known as Operation Twist, and the market resumed its advance such that on February 28, 2012, the Dow closed above the 13,000 level for the first time since May 19, 2008. Reaching a subsequent yearly low near 12,100 and a yearly high above 13,600 shortly after a third round of quantitative easing was announced by the Federal Reserve, and notwithstanding the status quo result of a hotly contested U.S. election and fears regarding a coming fiscal cliff of tax increases and spending freezes, the index settled at 13,104.14 to end 2012, only its second-ever yearly close above the 13,000 level. After tax increases were averted for most incomes, the Dow also got off to a great start in 2013 by having the its best January since 1994, closing at 13,860.58, or a gain of 5.77 percent. On February 1, 2013, the Dow traded above 14,000 for the first time since October 17, 2007 and closed at 14,009.79, within 155 points (or just over one percent) of its all-time closing high. On February 12, Lincoln's birthday, it reached new 64-month closing (14,018.70) and intraday (actual 14,038.97) highs leading into the State of the Union address.
  • K.E.S. SHROFF COLLEGE Page 19 Investing Investing in the DJIA is made widely accessible in equities through exchange-traded funds (ETFs) as well as in derivatives through option contracts and futures contracts. Equities Within equities, asset manager SSgA, issue a family of ETFs the SPDRs; one of which attempts to match the daily performance of the index, the DIAMONDS, introduced in 1998 (NYSE Arca: DIA). Another asset management firm, ProFunds, issue other related DJIA ETFs through ProShares such as the Inverse Performance (NYSE Arca: DOG) for a bearish strategy on the average. That is, when the Dow trades in negative territory, the ETF trades higher; thus, making it not needed to sell short if one has a bearish goal in mind. Due to the advent of pre-market trading, the DIAMONDS ETF provides a very accurate opening value for the average. As an example, if the ETF opens the trading session with a 76¢ loss; then that would strongly indicate roughly a 76-point loss for the Dow within the first few seconds or so, even before all of its components open for trade. Likewise, if the ETF starts the trading session higher by $1.12, then that would signal an approximate gain for the Dow of 112 points at the open, even if some components begin trading at 9:31 am or 9:33 am due to a delay. Leveraged equities Profunds also issues the 2x (NYSE Arca: DDM), which attempts to match the daily performance of the DJIA by 200% and the Inverse 2x (NYSE Arca: DXD), which attempts to match theinverse daily performance by 200%. In the case of 2x performance, the ETF increases the buying power by leveraging money without using margin. Currently, there are also 3x performance ETFs issued by ProShares that exist too; which attempt to replicate (300% leverage) against the Dow. For 3x performance, the symbol is (NYSE Arca: UDOW), and for Inverse 3x performance, it is (NYSE Arca: SDOW). Futures contracts In the derivatives market, the CME Group through its subsidiaries the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT), issues Futures Contracts; including the E-mini Dow ($5) Futures (YM), the DJIA ($10) Futures (DJ) and the Big Dow DJIA ($25) Futures (DD) which track the average and trade on their exchange floors respectively. Trading is typically carried out in an Open Outcry auction, or over an electronic network such as CME's Globex platform. Options contracts The Chicago Board Options Exchange (CBOE) issues Options Contracts on the Dow through the root symbol DJX in combination with long term expiration options called DJX LEAPS. Concerning equities, the exchange issues options contracts on Performance ETFs, Inverse Performance ETFs, 2x Performance ETFs, Inverse 2x Performance ETFs, 3x Performance ETFs, and Inverse 3x Performance ETFs.
  • K.E.S. SHROFF COLLEGE Page 20 Calculations To calculate the DJIA, the sum of the prices of all 30 stocks is divided by a divisor, the Dow Divisor. The divisor is adjusted in case of stock splits, spinoffs or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the DJIA. Early on, the initial divisor was composed of the original number of component companies; which made the DJIA at first, a simple arithmetic average. The present divisor, after many adjustments, is less than one (meaning the index is larger than the sum of the prices of the components). That is: where p are the prices of the component stocks and d is the Dow Divisor. Events like stock splits or changes in the list of the companies composing the index alter the sum of the component prices. In these cases, in order to avoid discontinuity in the index, the Dow Divisor is updated so that the quotations right before and after the event coincide: The Dow Divisor is currently 0.130216081 (last changed September 24, 2012).[26] Presently, every $1 change in price in a particular stock within the average, equates to a 7.68 (1/0.130216081) point movement. Assessment With the current inclusion of only 30 stocks, critics like Ric Edelman argue that the DJIA is not a very accurate representation of overall market performance. Still, it is the most cited and most widely recognized of the stock market indices. Additionally, the DJIA is criticized for being a price-weighted average, which gives higher-priced stocks more influence over the average than their lower-priced counterparts, but takes no account of the relative industry size or market capitalization of the components. For example, a $1 increase in a lower-priced stock can be negated by a $1 decrease in a much higher-priced stock, even though the lower-priced stock experienced a larger percentage change. In addition, a $1 move in the smallest component of the DJIA has the same effect as a $1 move in the largest component of the average. The Dow would see the negative effects of this price-weighted average during September–October 2008 with a former componentAIG. Before its reverse-split adjusted stock price change, the stock collapsed from $22.76 on September 8 to $1.35 on October 27; contributing to a roughly 3,000 point drop in the index. As of August 2012, IBM and Chevron are among the highest priced stocks in the average and therefore have the greatest influence on it. Alternately, Bank of America and Alcoa are among the lowest priced stocks in the average and have the least amount of sway in the price movement. Many critics of the DJIA recommend the float-adjusted market-value weighted S&P 500 or theWilshire 5000, the latter of which includes all U.S. equity securities, as better indicators of the U.S. stock market.
  • K.E.S. SHROFF COLLEGE Page 21 Correlations among stocks forming the Dow Jones Industial Average A quantitative analysis[30] of 72 years of financial data from the Dow Jones Industrial Average reveals that in times of financial crises, stocks start to move in a more synchronised fashion, increasing the risk of a stock portfolio. The research is published in the journal Scientific Reports. Financial traders try to reduce the inherent risk of holding only one stock by building portfolios, which carry a lower risk, mainly because individual stocks do not tend to experience daily gains and losses in a completely synchronised manner. Tobias Preis and colleagues analyzed daily closing prices of the 30 stocks that form the Dow Jones Industrial Average, from March 1939 to the end of 2010. They find that the average correlation between these stocks increases at the same rate as market stress. Consequently the diversification effect, which should protect a portfolio, melts away in times of market losses, just when it would be needed most.
  • K.E.S. SHROFF COLLEGE Page 22 How is the Dow Jones Industrial Average calculated? The Dow Jones Industrial Average (NYSE: DJI, also called the DJIA, Dow 30, INDP, or informally theDow Jones or The Dow) is one of several stock market indices, created by nineteenth-centuryWall Street Journal editor and Dow Jones & Company co-founder Charles Dow. It is an index that shows how certain stocks have traded. Dow compiled the index to gauge the performance of the industrial sector of the American stock market. It is the second- oldest U.S. market index, after the Dow Jones Transportation Average, which Dow also created. The average is computed from the stock prices of 30 of the largest and most widely held public companies in the United States. The "industrial" portion of the name is largely historical-many of the 30 modern components have little to do with traditional heavy industry. The average is price-weighted. To compensate for the effects of stock splits and other adjustments, it is currently a scaled average, not the actual average of the prices of its component stocks-the sum of the component prices is divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, to generate the value of the index. Since the divisor is currently less than one, the value of the index is higher than the sum of the component prices. To calculate the DJIA, the sum of the prices of all 30 stocks is divided by a divisor, the DJIA divisor. The divisor is adjusted in case of splits, spinoffs or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the DJIA. The initial divisor was the number of component companies, so that the DJIA was at first a simple arithmetic average; the present divisor, after many adjustments, is less than one (meaning the index is actually larger than the sum of the prices of the components). That is: where p are the prices of the component stocks and d is the Dow Divisor. Events like stock splits or changes in the list of the companies composing the index alter the sum of the component price. The current value of the DJIA Divisor is 0.1255527090. This value is regularly published in theWall Street Journal and is available on-line at the Chicago Board of Trade's web site.
  • K.E.S. SHROFF COLLEGE Page 23 How Does the Dow Jones Industrial Average Work The most famous stock market barometer is the Dow Jones Industrial Average (DJIA). When someone asks how the market is doing, most investors quote the DJIA (simply referred to as ―the Dow‖). The Dow is price weighted and tracks a basket of 30 of the largest and most influential public companies in the stock market. The following list shows the current roster of 30 stocks tracked on the DJIA (in alphabetical order by company with their stock symbols in parentheses). Alcoa (AA) Honeywell International Inc. (HON) Altria (MO) Intel (INTC) American Express Co. (AXP) International Business Machines (IBM) American International Group (AIG) Johnson & Johnson (JNJ) Boeing (BA) J.P. Morgan Chase (JPM) Caterpillar (CAT) McDonald’s (MCD) Citigroup (C) Merck (MRK) Coca-Cola (KO) Microsoft (MSFT) Disney (DIS) Minnesota Mining and Manufacturing (3M) (MMM) DuPont (DD) Pfizer (PFE) Exxon Mobil (XOM) Procter & Gamble (PG) General Electric (GE) SBC Communications (SBC) General Motors (GM) United Technologies (UTX) Hewlett-Packard (HPQ) Verizon (VZ) Home Depot (HD) Wal-Mart Stores (WMT) The Dow has survived as a popular gauge of stock market activity for over a century. Although it’s an important indicator of the market’s progress, the Dow does have one major drawback: It tracks only 30 companies. uotations right before and after the event coincide: The current value of the DJIA Divisor is 0.1255527090. This value is regularly published in theWall Street Journal and is available on-line at the Chicago Board of Trade's web site.
  • K.E.S. SHROFF COLLEGE Page 24 Dow Jones Indexes Dow Jones Indexes (DJI) is as an entity within Dow Jones & Co. and was formed in 1997. It is now owned by the CME Group. It serves as the marketing name of CME Group Indexes, LLC.[1] It produces, maintains, licenses and markets indexes as benchmarks and as the basis of investible products such as exchange traded funds (ETFs), mutual funds and structured products. The company currently has employees in 14 cities worldwide, including Princeton, NJ, New York, Chicago, London, Frankfurt, Singapore, Hong Kong, Beijing, Mexico City and Dubai (its latest office). In 2010, the Company became Dow Jones Indexes, a CME Group Company. Dow Jones' best known index is the Dow Jones Industrial Average, which was created in 1896. The oldest index in use is the Dow Jones Transportation Index, which was created in 1882 by Charles Dow, founder of The Wall Street Journal. An index follows a certain market and gives investors a single number to summarize its ups and downs. It is a means by which the world's institutional (and retail) investors can track a market without having to buy the underlying components. It is a convenient way for someone interested in a broad, narrow or extremely narrow group of securities to track them. Pension funds and other money managers often use indexes as benchmarks. This means that "active" investors (those who pick various securities to buy and hold for their returns) track their own returns against a benchmark index (an index that typifies its market) to see if they are out- or under-performing that market. Investors who do not want to do this (those who buy into indexes or securities that use indexes as their basis) are called "passive" investors. They are known to link their portfolios to the broad market and do not try to outguess conventional market wisdom. Passive investors argue that almost no active investors can beat the overall markets in the long-term.
  • K.E.S. SHROFF COLLEGE Page 25 Major Historical Events That Affected Dow Jones Index The Dow Jones index is affected by a number of things, and there have been some historical events which have had a big impact on this index. Right before the Great Depression the Dow Jones crashed and fell an astounding 90% in just a few days, and this ushered in the following depression that is still remembered today. The crash of 1929 is still considered the most significant historical event to ever affect the market. This crash started on Black Thursday, October 24, 1929 and lasted for four days but the sell off that the crash started had devastating consequences for the entire country. The index went from 381.2 as the close on September 3, 1929 to the low of 41.22 as the close on July 8, 1932. During the initial 4 day crash the trading volume on the stock market more than tripled. Another historical event that affected the Dow Jones index was the recession of 1945. The index lost a large 19.3% from June of 1946 through October 1946. Other recessions also affected the Dow Jones, like the one in 1953 that lasted from January 1 and September 1 of this year and caused a drop of 7.5%. Another recession in 1957 caused a drop in the index of 14.1%, and the recession of 1960 caused the Dow to lose 13.9%. In 1962 the Cuban Missile Crisis was another historical event that affect the index. When the embargo against Cuba was enacted by the USA on February 1962 the index lost 26.5%. During October of this year tension between the two countries were very high, and this cost the Dow an additional 2% after the speech given by President Kennedy. Recessions from December 31, 1968 through 1970, from 1973 through 1975, from 1980 through 1982, and from 1990 through 1991 all impacted the Dow Jones index in various degrees. In 1970 the Dow Jones had dropped 30% in a year and a half, and from 1973 through 1975 the loss was an astounding 45%. The 1980 to 1982 recession only caused an index loss of 16%. The invasion of Kuwait by Iraq is another historical event that affected the index and the markets. In the three-month period after the invasion the Dow Jones fell 18%. Another historical event was the 1987 stock market crash, which occurred on October 19, 1987. It is believed that this crash was due to forced sell orders issued by computers and the result was a loss of more than 460 points. This crash is also believed to be the cause of the savings and loan crisis that occurred in 1989. In 1997-1998 the currency crisis also affected the Dow Jones index. First in 1997 Thailand caused currency devaluation across Southeast Asia when the country eliminated the dollar peg for the currency. Then in 1998 Russia defaulted on a number of bonds and the ruble was devalued. This caused the Dow Jones to drop as well as the entire stock market. This drop was a big 20% loss for the market.
  • K.E.S. SHROFF COLLEGE Page 26 CHAPTER-5 S&P 500 The S&P 500, or the Standard & Poor's 500, is a stock market index based on themarket capitalizations of 500 leading companies publicly traded in the U.S. stock market, as determined by Standard & Poor's. It differs from other U.S. stock market indices such as the Dow Jones Industrial Average and the Nasdaq due to its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices and many consider it the best representation of the market as well as abellwether for the U.S. economy. The National Bureau of Economic Research has classified common stocks as a leading indicator of business cycles.[5] It is a free-float capitalization-weighted index. The index is maintained by Standard & Poor's, a division of McGraw-Hill that publishes a variety of other stock market indices such as the S&P MidCap 400, the S&P SmallCap 600 and the S&P Composite 1500. The S&P 500 index has several ticker symbols: ^GSPC,. INX, and $SPX History of s&p 500 Standard & Poor's introduced its first stock index in 1923. Before 1957 its primary daily stock market index was the "S&P 90", a value-weighted index based on 90 stocks. Standard & Poor's also published a weekly index of 423 companies. The S&P 500 index in its present form began on March 4, 1957. Technology has allowed the index to be calculated and disseminated in real time. The S&P 500 is widely employed as a measure of the general level of stock prices, as it includes both growth stocks and the generally less volatile value stocks. The index reached an all-time intraday high (which was not exceeded for over seven years) of 1,552.87 in trading on March 24, 2000, during the dot-com bubble, after closing 1999 at 1,469.25 points, and then lost approximately 50% of its value in a two-year bear market, spiking below 800 points in July 2002 and reaching a low of 768.63 intraday on October 10, 2002 during the stock market downturn of 2002. The S&P 500 remained below its year-2000 all-time high somewhat longer than the popular Dow Jones Industrial Average and the more comprehensive Wilshire 5000. However, on May 30, 2007, the S&P 500 closed at 1,530.23 to set its first all-time closing high in more than seven years. The highest level reached was 1,565.15 on October 9, 2007, but the index failed to make a new yearly closing high by less than one point, finishing 2007 at 1,468.36 points. This longer-term double top would prove to be ominous, as the index crashed below 1,400 in less than a month and would not see similar levels again for almost five years. In mid-2007 difficulties stemming from subprime mortgage lending began spreading to the wider financial sector, resulting in the second bear market of the 21st century. The resulting crisis became acute in September 2008, ushering in a period of unusual volatility, encompassing record 100-point moves in both directions and reaching the highest levels since 1929. On November 20, 2008, the index closed at 752.44, its lowest since early 1997. A modest recovery the following day still left the index down 45.5% for the year. This year-to- date loss was the greatest since 1931, when the broad market declined more than 50%; the total losses that ushered in the Great Depression exceeded 80% over a three-year period.
  • K.E.S. SHROFF COLLEGE Page 27 The market continued to decline between late 2008 and early 2009 surrounding the events involving the financial crisis of 2008, reaching a nearly 13-year closing low at 676.53 on March 9, 2009. Subsequently, the index recovered sharply with each of several rounds of Federal Reserve quantitative easing (QE); the advance has been alternately characterized as heralding a return to economic growth, or a significant counter-trend bear market rally. Although the markets continued to experience significant volatility amid electoral and fiscal uncertainty, gains continued, and the 2012 close of the S&P 500 following QE3 was its third-highest ever, at 1,426.22 points. With the extension of relatively low tax rates for most incomes at the start of 2013, the index continued to climb and reached 1,502.96 on January 25, 2013, its first daily and weekly close above the 1,500 level since early December 2007. Leading into the State of the Union address on Lincoln's birthday, February 12, the index reached its highest close (1,519.43) since November 1, 2007, and its highest intraday level (1,522.29) since December 11, 2007.
  • K.E.S. SHROFF COLLEGE Page 28 Selection of components of s&p 500 The components of the S&P 500 are selected by committee. This is similar to the Dow Jones Industrial Average, but different from others such as the Russell 1000, which are strictly rules-based. When considering the eligibility of a new addition, the committee assesses the company's merit using eight primary criteria: market capitalization, liquidity, domicile, public float, sector classification, financial viability, length of time publicly traded and listing exchange. The committee selects the companies in the S&P 500 so they are representative of the industries in the United States economy. In order to be added to the index, a company must have a market capitalization of at least US$ 4.0 billion. When assessing liquidity, the committee reviews a company's ratio of annual dollar value traded to float-adjusted market capitalization with the requirement that the ratio is greater than 1.0. The company's stock should also maintain a minimum monthly trading volume of 250,000 shares in each of the six months leading up to the evaluation date. The securities must be publicly listed on either the NYSE (NYSE Arca or NYSE MKT) or NASDAQ (NASDAQ Global Select Market, NASDAQ Select Market or the NASDAQ Capital Market). Securities that are ineligible for inclusion in the index are limited partnerships,master limited partnerships, OTC bulletin board issues, closed-end funds, ETFs, ETNs, royalty trusts, tracking stocks, preferred shares, unit trusts, equity warrants, convertible bonds, investment trusts, ADRs, ADSs and MLP IT units.[3] In contrast, the Fortune 500 attempts to list the 500 largest public companies in the United States by gross revenue, regardless of whether their stock trades publicly or their liquidity, without adjustment for industry representation, and excluding companies incorporated outside the United States. The index does include non-U.S. companies (21 as of December 24, 2012). This group includes both formerly U.S. companies that havereincorporated outside the United States, as well as firms that have never been incorporated in the United States.
  • K.E.S. SHROFF COLLEGE Page 29 Calculation of value of s&p 500 index To calculate the value of the S&P 500 Index, the sum of the adjusted market capitalization of all 500 stocks is divided by a factor, usually referred to as the Divisor. For example, if the total adjusted market cap of the 500 component stocks is US$13 trillion and the Divisor is set at 8.933, then the S&P 500 Index value would be 1,455.28. Although the adjusted market capitalization of the entire index can be accessed from Standard & Poor's website,[1] the Divisor is considered to be proprietary to the firm.[16] The formula to calculate the S&P 500 Index value is: where P is the price of each stock in the index and Q is the number of shares publicly available for each stock. The divisor is adjusted in the case of stock issuance, spin-offs or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the Index.
  • K.E.S. SHROFF COLLEGE Page 30 CHAPTER-6 WHAT IS THE DIFFERENCE BETWEEN DJIA AND S&P 500 The major difference between these two indexes is that the Dow Jones Industrial Average (DJIA) includes a price-weighted average of 30 stocks whereas the Standard & Poor's 500 (S&P 500) is a market value-weighted index of 500 stocks. The editors of the Wall Street Journal, which is owned by Dow Jones & Co, pick the stocks comprising the DJIA, while an S&P committee picks the 500 stocks in the S&P 500. The Dow is comprised of 30 of the largest companies in the U.S. across a range of industries except for transport and utilities. The criteria for a company to get on the Dow is vague; the companies are leaders in their industry and very large. The components in the DJIA do not change often as it takes an important change in a company for it to be removed from the index, and if the index comes up for review, the Wall Street Journal editors often replace more than one company at a time. The S&P 500 is comprised of 500 large companies from a vast number of industries, picked based on the following criteria: 1. Market capitalization of more than $5 billion 2. Four consecutive quarters of profit determined by net income less discontinued operations and extraordinary items 3. Adequate liquidity measured by price and volume (annual dollar value traded to market cap should be at least 0.3) 4. Public float of at least 50% The S&P 500 strives to represent all of the stocks over $5 billion by making sure the index closely matches the sector weighting that is seen in all stocks above $5 billion. For example if 20% of stocks with a market cap of over $5 billion are technology companies, the S&P 500 would try and have a technology weighting of around 20%. The S&P 500 will only include companies it determines to be operating, excluding such things as closed-end funds, holding companies, partnership and royalty trusts. Both of these measurements are used by investors to determine the general trend of the U.S. stock market. However, the S&P 500 is more encompassing as it includes a greater sample of total U.S. stocks and because the S&P 500 is market-value weighted, it attempts to ensure that a 10% change in a $20 stock will affect the index like a 10% change in a $50 stock. The DJIA, on the other hand, is price-weighted, which means the average is affected considerably more by the large stocks within its portfolio.
  • K.E.S. SHROFF COLLEGE Page 31 CHAPTER-7 BSE Stock Exchange, commonly referred to as the BSE, (Bombay Śhare Bāzaār) is a stock exchange located on Dalal Street, Mumbai, Maharashtra, India. It is the 10th largest stock exchange in the world by market capitalization. Established in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is Asia’s first Stock Exchange and one of India’s leading exchange groups. Over the past 137 years, BSE has facilitated the growth of the Indian corporate sector by providing it an efficient capital-raising platform. Popularly known as BSE, the bourse was established as "The Native Share & Stock Brokers' Association" in 1875. BSE is a corporatized and demutualised entity, with a broad shareholder-base which includes two leading global exchanges, Deutsche Bourse and Singapore Exchange as strategic partners. BSE provides an efficient and transparent market for trading in equity, debt instruments, derivatives, mutual funds. It also has a platform for trading in equities of small- and-medium enterprises (SME). Around 5000 companies are listed on BSE making it world's No. 1 exchange in terms of listed members. The companies listed on BSE Ltd command a total market capitalization of USD Trillion 1.2 as of October 31, 2012. BSE Ltd is world's fifth most active exchange in terms of number of transactions handled through its electronic trading system. It is also one of the world’s leading exchanges (3rd largest in July 2012) for Index options trading (Source: World Federation of Exchanges). BSE also provides a host of other services to capital market participants including risk management, clearing, settlement, market data services and education. It has a global reach with customers around the world and a nation-wide presence. BSE systems and processes are designed to safeguard market integrity, drive the growth of the Indian capital market and stimulate innovation and competition across all market segments. BSE is the first exchange in India and second in the world to obtain an ISO 9001:2000 certification. It is also the first Exchange in the country and second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its On-Line trading System (BOLT). It operates one of the most respected capital market educational institutes in the country (the BSE Institute Ltd.). BSE also provides depository services through its Central Depository Services Ltd. (CDSL) arm. BSE’s popular equity index - the SENSEX - is India's most widely tracked stock market benchmark index. It is traded internationally on the EUREX as well as leading exchanges of the BRCS nations (Brazil, Russia, China and South Africa)
  • K.E.S. SHROFF COLLEGE Page 32 CHAPTER-8 MILESTONES OF BSE In its 137-year glorious history, BSE has crossed several milestones and been a driver of several key initiatives and developments in the Indian capital market.
  • K.E.S. SHROFF COLLEGE Page 36 Dollex-30 BSE also calculates a dollar-linked version of SENSEX and historical values of this index are available since its inception. (For more details click 'Dollex series of BSE indices') SENSEX - Script Selection Criteria 1. Equities of companies listed on BSE Ltd. (excluding companies classified in Z group, listed mutual funds, scrips suspended on the last day of the month prior to review date, stocks objected by the Surveillance department of the Exchange and those that are traded under permitted category and SME category) shall be considered eligible 2. Listing History: The scrip should have a listing history of at least three months at BSE. An exception may be granted to one month, if the average free-float market capitalization of a newly listed company ranks in the top 10 of all companies listed at BSE. In the event that a company is listed on account of a merger / demerger / amalgamation, a minimum listing history is not required. 3. The stock should have been traded on each and every trading day in the last three months at BSE. Exceptions can be made for extreme reasons like scrip suspension etc. 4. Companies that have reported revenue in the latest four quarters from its core activity are considered eligible. 5. From the list of constituents selected through Steps 1-4, the top 75 companies based on free-float market capitalisation (avg. 3 months) are selected as well as any additional companies that are in the top 75 based on full market capitalization (avg. 3 months). 6. The filtered list of constituents selected through Step 5 (which can be greater than 75 companies) is then ranked on absolute turnover (avg. 3 months). 7. Any company in the filtered, sorted list created in Step 6 that has Cumulative Turnover of >98%, are excluded, so long as the remaining list has more than 30 scrips. 8. The filtered list calculated in Step 7 is then sorted by free float market capitalization. Any company having a weight within this filtered constituent list of <0.50% shall be excluded 9. All remaining companies will be sorted on sector and sub-sorted in the descending order of rank on free-float market capitalization. 10. Industry/Sector Representation: Scrip selection will generally attempt to maintain index sectoral weights that are broadly in-line with the overall market.
  • K.E.S. SHROFF COLLEGE Page 37 SENSEX Calculation Methodology SENSEX is calculated using the "Free-float Market Capitalization" methodology, wherein, the level of index at any point of time reflects the free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization. The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of SENSEX involves dividing the free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX on a continuous basis. Understanding Free-float Methodology Free-float methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in the index. Free-float market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market. It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a free-float index is reduced to the extent of its readily available shares in the market. Subsequently all BSE indices with the exception of BSE-PSU index have adopted the freefloat methodology.
  • K.E.S. SHROFF COLLEGE Page 38 CHAPTER-9 MAJOR CRASH IN THE BSE SENSEX The major crash in the BSE Sensex began in the beginning of third week of January 2008. Earlier 9th January the Sensex was hovering around its highest mark of 21,800 but on the week beginning 21st January the Sensex crashed. In mere 2 days the Sensex had witnessed 4 circuit breakers with the crash of around 4000 points. That marked the beginning of down phase of the Sensex. Though many fundamental analysts were still apprehensive of the fact that Indian economy is strong in fundaments and it’s a short term fall but most of the technical analysts believed that it’s the beginning of Bear phase of Indian markets. Since then we have witnessed Sensex falling to even 7,500 level though some relief rallies at different points of times have allowed investors to make profit out of it. But talking about the current scenario though the Sensex is on the path of recovery but it has still not recovered from that phase and is hovering around 18,000. Along with the investors, the next class of people to take the toll of falling markets was stock brokers. With the markets falling below the anticipated levels, the volumes of trading in the BSE squeezed to the large extent. With this the profit of the brokers also saw a sharp decline as they were unable to acquire new clients and their profit from existing client also decreased to a large extent. The retail investors had lost their hard earned money due to the market crash and many of them refrained from entering the stock market in the near future. Also, trading volume in all the segments and products in the market decreased. The retail investors drew their attention from high risk high return USP of financial market to fixed income securities and government securities to safeguard their capital. It was the period which saw an increase in the volume of debt funds and fixed income securities in the market
  • K.E.S. SHROFF COLLEGE Page 39 Bombay stock exchange-SMEs index The Bombay Stock Exchange (BSE) launched an Small and Medium Enterprises (SMEs) index that aims at tracking the current primary market conditions in theIndian capital market and measure the growth in investors' wealth over a period. The index will be constituted by SMEs listed on the BSE SME platform. There are 11 companies listed on the SME platform and this index will have features similar to the BSE IPO index. "This index will help to track and measure the growth of the companies over a period. Through this, the authorities can recognise the viability of the company. "And based on the report, people can invest in these companies, which will not only help the organisations to grow their businesses but also create employment," Minister of State (Independent Charge) Ministry of Micro Small and Medium Enterprises K H Muniyappa said here at the launch of the index. Typically, SME companies in the country have had to rely on debt financing from banks or non-banking financial institutions as equity capital was largely inaccessible to them. Out of the 11 companies listed so far, 10 are trading above their issue prices, while one is below its IPO price. Small and Medium Enterprises (SMEs) in India constitute an important segment of Indian economy. Currently, the contribution of SMEs alone has been greater than 7 per cent to GDP and 45 per cent to industrial production. It is also the second largest provider of employment after agriculture. SMEs also contribute to 40 per cent of total exports directly and a significant amount of exports indirectly through large trading houses or third parties.
  • K.E.S. SHROFF COLLEGE Page 40 Bombay StockExchange rejigs mid-cap, small-cap indices - ndtv profit Leading bourse Bombay Stock Exchange (BSE) announced changes in its indices for the mid-cap and small-cap segments, which will come into effect from January 14. A total of 12 new stocks have been included in the BSE Mid-Cap index, while eight existing ones would move out. In the BSE Small-Cap index, the exchange would include 28 new scrips and exclude 38 existing ones, according to a BSE statement. Those joining mid-cap index includes Crompton Greaves Ltd, TV18 Broadcast Ltd, Network 18 Media & Investments Ltd, Credit Analysis and Research Ltd (CARE) and National Buildings Construction Corp Ltd (NBCC). While BEML, Hindustan Oil Exploration Co Ltd, Tulip Telcom Ltd, Jindal Stainless Ltd and State Trading Corporation of India would exit from the index. Sonata Software, Suven Life Sciences and Cinemax India, among others, would be included in the BSE Small-Cap index. Those being excluded from the Small-Cap index included Bharati Shipyard, Pradip Overseas, Timex Group India, Deccan Chronicle Holdings Ltd and JK Cement. In addition, the exchange has included Satyam Computer Services Ltd and Glenmark Pharmaceuticals in the BSE TASIS Shariah 50, as part of its periodic review.
  • K.E.S. SHROFF COLLEGE Page 41 CHAPTER-10 BOMBAY STOCK EXCHANGE IMPROVES EFFICIENCY WITH TNS - CASE STUDY Business Challenge Access to BSE for trading and market data has been limited to participants who have set up their offices within India. Typically these offices were connected over leased lines. The BSE required managed connectivity for both major financial organisations in India and outside the country. Solution BSE appointed TNS to provide access to trading functionality and market data information via its fully managed Secure Trading Extranet. TNS’ Secure Trading Extranet connects over 1,500 financial community end-points, representing buy and sell-side institutions, market data and software vendors, exchanges and alternative trading venues. It boasts over 120 points of presence and provides services to customers across America, Europe and the Asia Pacific region, with its reach extending to many more.
  • K.E.S. SHROFF COLLEGE Page 42 CHAPTER-11 CONCLUSION With this project I would like to conclude that Stock Excahnges play an important role in Nations Economic Development. The Dow Jones Industrial Average (DJIA) has an impact on the world economy and BSE can be consider as one of the most efficient Stock Exchanges for the World, considering the milestones achieved sinces its establishments.
  • K.E.S. SHROFF COLLEGE Page 43 CHAPTER-12 BIBLOGRAPHY  Vipul Prakashan GCM Text Book       