Ross Finance Club Weekly Ross Finance Club Weekly BreakoutBreakout

Sales, Trading, and ResearchSales, Trading, and Research

December 5, 2004December 5, 2004

Zachary EmigZachary Emig

MBA Class of 2005MBA Class of 2005

AgendaAgenda

I. Major Stock IndicesI. Major Stock Indices

Dow Jones Industrial Dow Jones Industrial AverageAverage• Since 1928, 30 component stocks.Since 1928, 30 component stocks.• Stocks are decided by editors of the Wall Stocks are decided by editors of the Wall

Street Journal (owned by Dow Jones).Street Journal (owned by Dow Jones).• 30 DJIA stocks intended to represent 25% 30 DJIA stocks intended to represent 25%

to 30% of the overall market.to 30% of the overall market.• At any moment, the index price is At any moment, the index price is

determined by summing the components determined by summing the components stock prices and dividing by the adjusted stock prices and dividing by the adjusted divisor.divisor.

• DJIA is a DJIA is a price weightedprice weighted index – the index – the higher a component’s price goes, the more higher a component’s price goes, the more weight it has within the index.weight it has within the index.

http://www.djindexes.com/downloads/brochure_info/Dow_Brochure.pdfhttp://www.djindexes.com/downloads/brochure_info/Dow_Brochure.pdf

DJIA Example: COB DJIA Example: COB 11/22/200411/22/2004

With the closing With the closing values, we can values, we can roughly roughly calculate what calculate what the divisor is.the divisor is.

Stock Closing Stock Closing Stock ClosingAA 33.65 HD 43.23 MO 57.75AIG 62.85 HON 35.65 MRK 27.13AXP 56.12 HPQ 20.20 MSFT 26.65BA 53.97 IBM 95.11 PFE 27.07C 45.17 INTC 24.10 PG 54.46CAT 90.10 JNJ 60.87 SBC 25.52DD 45.22 JPM 37.55 UTX 97.23DIS 27.19 KO 39.87 VZ 40.99GE 36.09 MCD 29.38 WMT 55.68GM 39.05 MMM 80.74 XOM 50.91

1,419.5010,489.42

0.1353Divisor

DJ IA ClosingSum of Stock Prices

DJIA Example: COB DJIA Example: COB 11/22/200411/22/2004

• Let’s say that Dow Jones wanted to take out Let’s say that Dow Jones wanted to take out low-tech Microsoft (MSFT) and add high-tech low-tech Microsoft (MSFT) and add high-tech Union Pacific (UNP).Union Pacific (UNP).

• UNP’s closing on 11/22: $63.45.UNP’s closing on 11/22: $63.45.

Stock Closing Stock Closing Stock ClosingAA 33.65 HD 43.23 MO 57.75AIG 62.85 HON 35.65 MRK 27.13AXP 56.12 HPQ 20.20 MSFT 26.65BA 53.97 IBM 95.11 PFE 27.07C 45.17 INTC 24.10 PG 54.46CAT 90.10 JNJ 60.87 SBC 25.52DD 45.22 JPM 37.55 UTX 97.23DIS 27.19 KO 39.87 VZ 40.99GE 36.09 MCD 29.38 WMT 55.68GM 39.05 MMM 80.74 XOM 50.91

UNP 63.45

1,456.3010,489.42

0.1388

DJ IA Closing

Divisor

Sum of Stock Prices

• Add up the new Add up the new components’ components’ prices.prices.

• Divide the sum by Divide the sum by the previous DJIA the previous DJIA closing.closing.

• This returns the This returns the new divisor.new divisor.

S&P 500S&P 500• S&P 500 comprised of the 500 largest cap S&P 500 comprised of the 500 largest cap

US stocks.US stocks.

• Usually covers about 80% of total market Usually covers about 80% of total market value.value.

• In comparison to the DJIA, the S&P 500 is In comparison to the DJIA, the S&P 500 is market cap weightedmarket cap weighted: companies with : companies with bigger market caps (# shares x price) have bigger market caps (# shares x price) have more effect.more effect.

• Like the DJIA, the S&P 500 has a divisor to Like the DJIA, the S&P 500 has a divisor to keep it’s value constant.keep it’s value constant.

• Component list updated more frequently Component list updated more frequently than DJIA due to criteria.than DJIA due to criteria.http://www.standardandpoors.comhttp://www.standardandpoors.com

NASDAQ Composite IndexNASDAQ Composite Index

• Covers all domestic and international Covers all domestic and international common stock listed on NASDAQ.common stock listed on NASDAQ.

• Currently over 3,240 components. Currently over 3,240 components. • Like the S&P 500, the index is Like the S&P 500, the index is

market cap weightedmarket cap weighted..• Largest number of components.Largest number of components.• Like every other index, has a divisor Like every other index, has a divisor

that must be adjusted for new equity that must be adjusted for new equity issuance, stock splits, etc.issuance, stock splits, etc.

http://www.nasdaq.com/reference/Comp_Eligibility_Criteria.stmhttp://www.nasdaq.com/reference/Comp_Eligibility_Criteria.stm