2-Financial Markets Page 47 Wednesday, February 4, 2004 1:15 PM
Overview of Financial Markets, Financial Assets, and Market Participants 47universe, and that sample may be small or quite large. The DJIA uses
only 30 of the NYSE-traded shares, while the NYSE Composite includes
every one of the listed shares. The NASDAQ also includes all shares in
its universe, while the S&P 500 has a sample that contains only 500 of
the more than 8,000 shares in the universe it represents.
The stocks included in a stock market index must be combined in cer-
tain proportions, and each stock must be given a weight. The three main
approaches to weighting are: (1) weighting by the market capitalization,
which is the value of the number of shares times price per share; (2)
weighting by the price of the stock; and (3) equal weighting for each
stock, regardless of its price or its firm’s market value. With the exception
of the Dow Jones averages (such as the DJIA) and the VLCA, nearly all of
the most widely used indexes are market-value weighted. The DJIA is a
price-weighted average, and the VLCA is an equally weighted index.
Stock market indicators can be classified into three groups: (1) those
produced by stock exchanges based on all stocks traded on the
exchanges; (2) those produced by organizations that subjectively select
the stocks to be included in indexes; and (3) those where stock selection
is based on an objective measure, such as the market capitalization of
the company. The first group includes the New York Stock Exchange
Composite Index, which reflects the market value of all stocks traded on
the NYSE. While it is not an exchange, the NASDAQ Composite Index
falls into this category because the index represents all stocks traded on
the NASDAQ system.
The three most popular stock market indicators in the second group
are the Dow Jones Industrial Average, the Standard & Poor’s 500, and
the Value Line Composite Average. The DJIA is constructed from 30 of
the largest blue chip industrial companies traded on the NYSE. The
companies included in the average are those selected by Dow Jones &
Company, publisher of the Wall Street Journal. The S&P 500 represents
stocks chosen from the two major national stock exchanges and the
over-the-counter market. The stocks in the index at any given time are
determined by a committee of Standard & Poor’s Corporation, which
may occasionally add or delete individual stocks or the stocks of entire
industry groups. The aim of the committee is to capture present overall
stock market conditions as reflected in a very broad range of economic
indicators. The VLCA, produced by Value Line Inc., covers a broad
range of widely held and actively traded NYSE, AMEX, and OTC issues
selected by Value Line.
In the third group we have the Wilshire indexes produced by
Wilshire Associates (Santa Monica, California) and Russell indexes pro-
duced by the Frank Russell Company (Tacoma, Washington), a consult-
ant to pension funds and other institutional investors. The criterion for