Stock market index
A stock index or stock market index is a measurement of a section of the stock market. It is computed from the prices of selected stocks, it is a tool used by investors and financial managers to describe the market, to compare the return on specific investments. Two of the primary criteria of an index are that it is investable and transparent: the method of its construction should be clear. Many mutual funds and exchange-traded funds attempt to "track" an index with varying degrees of success; the difference between an index fund's performance and the index is called tracking error. Stock market indices may be classified in many ways. A'world' or'global' stock market index — such as the MSCI World or the S&P Global 100 — includes stocks from multiple regions. Regions may be defined geographically or by levels of income. A'national' index represents the performance of the stock market of a given nation—and by proxy, reflects investor sentiment on the state of its economy; the most quoted market indices are national indices composed of the stocks of large companies listed on a nation's largest stock exchanges, such as the American S&P 500, the Japanese Nikkei 225, the Indian NIFTY 50, the British FTSE 100.
Other indices may be regional, such as the FTSE Developed Europe Index or the FTSE Developed Asia Pacific Index. Indexes may be based on exchange, such as the NASDAQ-100 or NYSE US 100, or groups of exchanges, such as the Euronext 100 or OMX Nordic 40; the concept may be extended well beyond an exchange. The Wilshire 5000 Index, the original total market index, represents the stocks of nearly every publicly traded company in the United States, including all U. S. stocks traded on NASDAQ and American Stock Exchange. Russell Investment Group added to the family of indices by launching the Russel Global Index. More specialized indices exist tracking the performance of specific sectors of the market; some examples include the Wilshire US REIT which tracks more than 80 American real estate investment trusts and the Morgan Stanley Biotech Index which consists of 36 American firms in the biotechnology industry. Other indices may track companies of a certain size, a certain type of management, or more specialized criteria — one index published by Linux Weekly News tracks stocks of companies that sell products and services based on the Linux operating environment.
Some indices, such as the S&P 500, have multiple versions. These versions can differ based on how the index components are weighted and on how dividends are accounted for. For example, there are three versions of the S&P 500 index: price return, which only considers the price of the components, total return, which accounts for dividend reinvestment, net total return, which accounts for dividend reinvestment after the deduction of a withholding tax; as another example, the Wilshire 4500 and Wilshire 5000 indices have five versions each: full capitalization total return, full capitalization price, float-adjusted total return, float-adjusted price, equal weight. The difference between the full capitalization, float-adjusted, equal weight versions is in how index components are weighted. An index may be classified according to the method used to determine its price. In a price-weighted index such as the Dow Jones Industrial Average, NYSE Arca Major Market Index, the NYSE ARCA Tech 100 Index, the price of each component stock is the only consideration when determining the value of the index.
Thus, price movement of a single security will influence the value of the index though the dollar shift is less significant in a highly valued issue, moreover ignoring the relative size of the company as a whole. In contrast, a capitalization-weighted index such as the S&P 500 or Hang Seng Index factors in the size of the company. Thus, a small shift in the price of a large company will influence the value of the index. Traditionally, capitalization- or share-weighted indices all had a full weighting, i.e. all outstanding shares were included. Many of them have changed to a float-adjusted weighting which helps indexing. An equal-weighted index is one. For example, the Barron's 400 Index assigns an equal value of 0.25% to each of the 400 stocks included in the index, which together add up to the 100% whole. A modified capitalization-weighted index is a hybrid between capitalization weighting and equal weighting, it is similar to a capitalization weighting with one main difference: the largest stocks are capped to a percent of the weight of the total stock index and the excess weight will be redistributed amongst the stocks under that cap.
Moreover, in 2005, Standard & Poor's introduced the S&P Pure Growth Style Index and S&P Pure Value Style Index, attribute-weighted. That is, a stock's weight in the index is decided by the score it gets relative to the value attributes that define the criteria of a specific index, the same measure used to select the stocks in the first place. For these two indexes, a score is calculated for every stock, be it their growth score or the value score and accordingly they are weighted for the index. One argument for capitalization weighting is that investors must, in aggregate, hold a capitalization-weighted portfolio anyway; this gives the average return for all investors. Investors use theories such as modern portfolio theory to determine allocations; this considers risk and return and does not consider weights
In economics, a commodity is an economic good or service that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. Most commodities are raw materials, basic resources, agricultural, or mining products, such as iron ore, sugar, or grains like rice and wheat. Commodities can be mass-produced unspecialized products such as chemicals and computer memory; the price of a commodity good is determined as a function of its market as a whole: well-established physical commodities have traded spot and derivative markets. The wide availability of commodities leads to smaller profit margins and diminishes the importance of factors other than price; the word commodity came into use in English in the 15th century, from the French commodité, "amenity, convenience". Going further back, the French word derives from the Latin commoditas, meaning "suitability, advantage"; the Latin word commodus meant variously "appropriate", "proper measure, time, or condition", "advantage, benefit".
In economics, the term commodity is used for economic goods or services that have full or partial but substantial fungibility. Karl Marx described this property as follows: "From the taste of wheat, it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist." Petroleum and copper are examples of commodity goods: their supply and demand are a part of one universal market. Non-commodity items such as stereo systems have many aspects of product differentiation, such as the brand, the user interface and the perceived quality; the demand for one type of stereo may be much larger than demand for another. The price of a commodity good is determined as a function of its market as a whole. Well-established physical commodities have traded spot and derivative markets. Soft commodities are goods that are grown, such as rice. Hard commodities are mined. Examples include gold and oil. Energy commodities include electricity, gas and oil. Electricity has the particular characteristic that it is uneconomical to store, must therefore be consumed as soon as it is processed.
Commoditization occurs as a goods or services market loses differentiation across its supply base by the diffusion of the intellectual capital necessary to acquire or produce it efficiently. As such, goods that carried premium margins for market participants have become commodities, such as generic pharmaceuticals and DRAM chips. An article in The New York Times cites multivitamin supplements as an example of commoditization. Following this trend, nanomaterials are emerging from carrying premium profit margins for market participants to a status of commodification. There is a spectrum of commoditization, rather than a binary distinction of "commodity versus differentiable product". Few products have complete undifferentiability and hence fungibility. Many products' degree of commoditization means. For example, milk and notebook paper are not differentiated by many customers. Other customers take into consideration other factors besides price, such as environmental sustainability and animal welfare.
To these customers, distinctions such as "organic versus not" or "cage free versus not" count toward differentiating brands of milk or eggs, percentage of recycled content or Forest Stewardship Council certification count toward differentiating brands of notebook paper. This is a list of companies trading globally in commodities, descending by size as of October 28, 2011. Vitol Glencore International AG Trafigura Cargill Salam Investment Archer Daniels Midland Gunvor Mercuria Energy Group Noble Group Louis Dreyfus Group Bunge Limited Wilmar International Olam International In the original and simplified sense, commodities were things of value, of uniform quality, that were produced in large quantities by many different producers. On a commodity exchange, it is the underlying standard stated in the contract that defines the commodity, not any quality inherent in a specific producer's product. Commodities exchanges include: Bourse Africa Bursa Malaysia Derivatives Chicago Board of Trade Chicago Mercantile Exchange Dalian Commodity Exchange Euronext.liffe Kansas City Board of Trade London Metal Exchange Marché à Terme International de France Mercantile Exchange Nepal Limited Multi Commodity Exchange National Commodity and Derivatives Exchange National Commodity Exchange Limited New York Mercantile Exchange Markets for trading commodities can be efficient if the division into pools matches demand segments.
These markets will respond to changes in supply and demand to find an equilibrium price and quantity. In addition, investors can gain passive exposure to the commodity markets through a commodity price index. In order to di
A stock market, equity market or share market is the aggregation of buyers and sellers of stocks, which represent ownership claims on businesses. Examples of the latter include shares of private companies which are sold to investors through equity crowdfunding platforms. Stock exchanges list shares of common equity as well as other security types, e.g. corporate bonds and convertible bonds. Stocks are categorized in various ways. One way is by the country. For example, Nestlé and Novartis are domiciled in Switzerland, so they may be considered as part of the Swiss stock market, although their stock may be traded on exchanges in other countries, for example, as American depository receipts on U. S. stock markets. As of 2017, the size of the world stock market was about US$79.225 trillion. By country, the largest market was the United States, followed by the United Kingdom; these numbers increased in 2013. As of 2015, there are a total of 60 stock exchanges in the world with a total market capitalization of $69 trillion.
Of these, there are 16 exchanges with a market capitalization of $1 trillion or more, they account for 87% of global market capitalization. Apart from the Australian Securities Exchange, these 16 exchanges are based in one of three continents: North America and Asia. A stock exchange is an exchange where stock brokers and traders can buy and sell shares of stock and other securities. Many large companies have their stocks listed on a stock exchange; this makes the stock more liquid and thus more attractive to many investors. The exchange may act as a guarantor of settlement. Other stocks may be traded "over the counter", that is, through a dealer; some large companies will have their stock listed on more than one exchange in different countries, so as to attract international investors. Stock exchanges may cover other types of securities, such as fixed interest securities or derivatives which are more to be traded OTC. Trade in stock markets means the transfer of a security from a seller to a buyer.
This requires these two parties to agree on a price. Equities confer an ownership interest in a particular company. Participants in the stock market range from small individual stock investors to larger investors, who can be based anywhere in the world, may include banks, insurance companies, pension funds and hedge funds, their buy or sell orders may be executed on their behalf by a stock exchange trader. Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry; this method is used in some stock exchanges and commodity exchanges, involves traders shouting bid and offer prices. The other type of stock exchange has a network of computers. An example of such an exchange is the NASDAQ. A potential buyer bids a specific price for a stock, a potential seller asks a specific price for the same stock. Buying or selling at the market means you will accept any ask price or bid price for the stock; when the bid and ask prices match, a sale takes place, on a first-come, first-served basis if there are multiple bidders at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace. The exchanges provide real-time trading information on the listed securities, facilitating price discovery; the New York Stock Exchange is a physical exchange, with a hybrid market for placing orders electronically from any location as well as on the trading floor. Orders executed on the trading floor enter by way of exchange members and flow down to a floor broker, who submits the order electronically to the floor trading post for the Designated Market Maker for that stock to trade the order; the DMM's job is to maintain a two-sided market, making orders to buy and sell the security when there are no other buyers or sellers. If a spread exists, no trade takes place – in this case the DMM may use their own resources to close the difference. Once a trade has been made, the details are reported on the "tape" and sent back to the brokerage firm, which notifies the investor who placed the order.
Computers play an important role for program trading. The NASDAQ is a virtual exchange; the process is similar to the New York Stock Exchange. One or more NASDAQ market makers will always provide a bid and ask price at which they will always purchase or sell'their' stock; the Paris Bourse, now part of Euronext, is an electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange. Stockbrokers met on the trading floor of the Palais Brongniart. In 1986, the CATS trading system was introduced, the order matching process was automated. People trading stock will prefer to trade on the most popular exchange since this gives the largest number of potential counter parties and the best price. However, there have always been alternatives such as brokers trying to bring parties together to trade outside the exchange; some third markets that were popular are Instinet, Island and Archipelago. One advantage is that this avoids the commissions
The Wilshire 5000 Total Market Index, or more the Wilshire 5000, is a market-capitalization-weighted index of the market value of all US-stocks traded in the United States. As of June 30, 2018, the index contained only 3,486 components; the index is intended to measure the performance of most publicly traded companies headquartered in the United States, with available price data. Hence, the index includes a majority of the common stocks and REITs traded through New York Stock Exchange, NASDAQ, or the American Stock Exchange. Limited partnerships and ADRs are not included, it can be tracked by following the ticker ^W5000. The Wilshire 5000 Total Market Index was established by the Wilshire Associates in 1974, naming it for the approximate number of issues it included at the time, it was renamed the "Dow Jones Wilshire 5000" in April 2004, after Dow Jones & Company assumed responsibility for its calculation and maintenance. On March 31, 2009 the partnership with Dow Jones was terminated and the index returned to Wilshire Associates.
The base value for the index was 1404.60 points on base date December 31, 1980, when it had a total market capitalization of $1,404.596 billion. On that date, each one-index-point change in the index was equal to $1 billion. However, index divisor adjustments due to corporate actions and index composition changes have changed the relationship over time, so that by 2005 each index point reflected a change of about $1.2 billion in the index's total market capitalization. The index increased tenfold in less than twenty years from its base date, peaking at a 20th-century closing record high of 14,751.64 points on March 24, 2000, a level that would not be surpassed until February 20, 2007. A hypothetical investment in the Wilshire 5000, made at the 2000 peak and with subsequent dividends reinvested, did not become profitable on a closing basis until October 3, 2006. On April 20, 2007, the index closed above 15,000 for the first time. On that day, the S&P 500 was still several percentage points below its March 2000 high, because small cap issues absent from the S&P 500 and included in the Wilshire 5000 outperformed the large cap issues that dominate the S&P 500 during the cyclical bull market.
The index reached an all-time high on October 9, 2007 at the 15,806.69 point level, right before the onset of the Great Recession and the related financial crisis of 2007–08. Since late 2007, the expansion of subprime lending difficulties into a wider financial crisis plunged the United States into a renewed bear market that accelerated beginning on September 15, 2008. On October 8, the Wilshire 5000 closed below 10,000 for the first time since 2003; the index continued trading downward towards a 13-year low, reaching a bottom of 6,858.43 points, on March 9, 2009, representing a loss of about $10.9 trillion in market capitalization from its highs in 2007. The Wilshire 5000 gained $2.5 trillion in market value during the first 11 months of 2009 while the index rose 2,105 points. Therefore, as of November 2009, each index point represented about $1.2 billion in market value. The index achieved a new highest yearly close on December 31, 2012, a few percent above those of 1999 and 2007, but failed to do so above the 15,000 level by fewer than 5 points, closing with 14,995.11 points.
However, it continued to rise in the short term such that, on February 8, 2013, the index surpassed the 16,000 level for the first time. It would be the first of four 1000-point milestones that the index reached in 2013, as the index closed above 17,000 for the first time on May 3, 18,000 for the first time on August 1, 19,000 for the first time on November 14; the Wilshire 5000 would close out 2013 on a record high, finishing the December 31, 2013 trading session at 19,706.03 points. On February 28, 2014, the Wilshire 5000 had its first intraday high over 20,000 points. On March 4, the index closed above this milestone for the first time. On July 1, 2014, the index closed above the 21,000 level for the first time. On August 24, 2018, the Wilshire 5000 had its first intraday high and its first closing over 30,000 points. There are five versions of the index: Full capitalization total return Full capitalization price Float-adjusted total return Float-adjusted price Equal weightThe difference between the total return and price versions of the index is that the total return versions accounts for reinvestment of dividends.
The difference between the full capitalization, float-adjusted, equal weight versions is in how the index components are weighted. The full cap index uses the total shares outstanding for each company; the float-adjusted index uses shares adjusted for free float. The equal-weighted index assigns each security in the index the same weight. Let: M = Number of issues included in the index; the value of the index is then: α ∑ i = 1 M N i P i At present, one index point corresponds to a little more than US$1 billion of market capitalization. The list of issues included in the index is updated monthly to add new listings resulting from corporate spin-offs and initial public offerings, to remove issues which move to the pink sheets or that have ceased trading for at least 10 consecutive days; the CRSP U. S. Total Market Index is a similar comprehensive index of U. S. stocks supplied by the
A market trend is a perceived tendency of financial markets to move in a particular direction over time. These trends are classified as secular for long time frames, primary for medium time frames, secondary for short time frames. Traders attempt to identify market trends using technical analysis, a framework which characterizes market trends as predictable price tendencies within the market when price reaches support and resistance levels, varying over time. A trend can only be determined in hindsight; the terms "bull market" and "bear market" describe upward and downward market trends and can be used to describe either the market as a whole or specific sectors and securities. The names correspond to the fact that a bull attacks by lifting its horns upward, while a bear strikes with its claws in a downward motion. A secular market trend is a long-term trend that lasts 5 to 25 years and consists of a series of primary trends. A secular bear market consists of larger bear markets. In a secular bull market the prevailing trend is upward-moving.
The United States stock market was described as being in a secular bull market from about 1983 to 2000, with brief upsets including the crash of 1987 and the market collapse of 2000–2002 triggered by the dot-com bubble. In a secular bear market, the prevailing trend is downward-moving. An example of a secular bear market occurred in gold between January 1980 to June 1999, culminating with the Brown Bottom. During this period the market gold price fell from a high of $850/oz to a low of $253/oz. A primary trend lasts for a year or more. A bull market is a period of rising prices; the start of a bull market is marked by widespread pessimism. This point is when the "crowd" is the most "bearish"; the feeling of despondency changes to hope, "optimism", euphoria, as the bull runs its course. This leads the economic cycle, for example in a full recession, or earlier. An analysis of Morningstar, Inc. stock market data from 1926 to 2014 found that a typical bull market "lasted 8.5 years with an average cumulative total return of 458%", while annualized gains for bull markets range from 14.9% to 34.1%.
India's Bombay Stock Exchange Index, BSE SENSEX, had a major bull market trend for about five years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points, more than a 600% return in 5 years. Notable bull markets marked the 1925–1929, 1953–1957 and the 1993–1997 periods when the U. S. and many other stock markets rose. A bear market is a general decline in the stock market over a period of time, it is a transition from high investor optimism to widespread investor pessimism. According to The Vanguard Group, "While there's no agreed-upon definition of a bear market, one accepted measure is a price decline of 20% or more over at least a two-month period."A smaller decline of 10 to 20% is considered a correction. Once a market enters correction or bear market territory, it isn't considered to have exited that territory until a new high is reached. An analysis of Morningstar, Inc. stock market data from 1926 to 2014 found that a typical bear market "lasted 1.3 years with an average cumulative loss of −41%", while annualized declines for bear markets range from −19.7% to −47%.
A bear market followed the Wall Street Crash of 1929 and erased 89% of the Dow Jones Industrial Average's market capitalization by July 1932, marking the start of the Great Depression. After regaining nearly 50% of its losses, a longer bear market from 1937 to 1942 occurred in which the market was again cut in half. Another long-term bear market occurred from about 1973 to 1982, encompassing the 1970s energy crisis and the high unemployment of the early 1980s, yet another bear market occurred between March 2000 and October 2002. Recent examples occurred between October 2007 and March 2009, as a result of the financial crisis of 2007–2008. See 2015 Chinese stock market crash. A market top is not a dramatic event; the market has reached the highest point that it will, for some time. It is identified retrospectively, as market participants are not aware of it at the time it happens, thus prices subsequently fall, either or more rapidly. William J. O'Neil and company report that since the 1950s a market top is characterized by three to five distribution days in a major market index occurring within a short period of time.
Distribution is a decline in price with higher volume than the preceding session. The peak of the dot-com bubble occurred on March 24, 2000; the index closed at 4,704.73. The Nasdaq peaked at 5,132.50 and the S&P 500 at 1525.20. A recent peak for the broad U. S. market was October 9, 2007. The S&P 500 index closed at 1,565 and the Nasdaq at 2861.50. A market bottom is a trend reversal, the end of a market downturn, the beginning of an upward moving trend, it is difficult to identify a bottom while it is occurring. The upturn following a decline is short-lived and prices might resume their decline; this would bring a loss for the investor who purchased stock during a misperceived or "false" market bottom. Baron Roth
In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. In Transaction Costs and Economic Performance, Douglass C. North argues that institutions, understood as the set of rules in a society, are key in the determination of transaction costs. In this sense, institutions that facilitate low transaction costs, boost economic growth. Douglass North states that there are four factors that comprise transaction costs – "measurement," "enforcement," "ideological attitudes and perceptions," and "the size of the market." Measurement refers to the calculation of the value of all aspects of the good or service involved in the transaction. Enforcement can be defined as the need for an unbiased third party to ensure that neither party involved in the transaction reneges on their part of the deal; these first two factors appear in the concept of ideological attitudes and perceptions, North's third aspect of transaction costs. Ideological attitudes and perceptions encapsulate each individual's set of values, which influences their interpretation of the world.
The final aspect of transaction costs, according to North, is market size, which affects the partiality or impartiality of transactions. Transaction costs can be divided into three broad categories: Search and information costs are costs such as in determining that the required good is available on the market, which has the lowest price, etc. Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on. In game theory this is analyzed for instance in the game of chicken. On asset markets and in market microstructure, the transaction cost is some function of the distance between the bid and ask. Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract, taking appropriate action if this turns out not to be the case. For example, the buyer of a used car faces a variety of different transaction costs; the search costs are the costs of determining the car's condition.
The bargaining costs are the costs of negotiating a price with the seller. The policing and enforcement costs are the costs of ensuring that the seller delivers the car in the promised condition; the idea that transactions form the basis of an economic thinking was introduced by the institutional economist John R. Commons, he said that: These individual actions are trans-actions instead of either individual behavior or the "exchange" of commodities. It is this shift from commodities and individuals to transactions and working rules of collective action that marks the transition from the classical and hedonic schools to the institutional schools of economic thinking; the shift is a change in the ultimate unit of economic investigation. The classic and hedonic economists, with their communistic and anarchistic offshoots, founded their theories on the relation of man to nature, but institutionalism is a relation of man to man; the smallest unit of the classic economists was a commodity produced by labor.
The smallest unit of the hedonic economists was the same or similar commodity enjoyed by ultimate consumers. One was the objective side, the other the subjective side, of the same relation between the individual and the forces of nature; the outcome, in either case, was the materialistic metaphor of an automatic equilibrium, analogous to the waves of the ocean, but personified as "seeking their level." But the smallest unit of the institutional economists is a unit of activity – a transaction, with its participants. Transactions intervene between the labor of the classic economists and the pleasures of the hedonic economists because it is society that controls access to the forces of nature, transactions are, not the "exchange of commodities," but the alienation and acquisition, between individuals, of the rights of property and liberty created by society, which must therefore be negotiated between the parties concerned before labor can produce, or consumers can consume, or commodities be physically exchanged".
The term "transaction cost" is thought to have been coined by Ronald Coase, who used it to develop a theoretical framework for predicting when certain economic tasks would be performed by firms, when they would be performed on the market. However, the term is absent from his early work up to the 1970s. While he did not coin the specific term, Coase indeed discussed "costs of using the price mechanism" in his 1937 paper The Nature of the Firm, where he first discusses the concept of transaction costs, refers to the "Costs of Market Transactions" in his seminal work, The Problem of Social Cost; the term "Transaction Costs" itself can instead be traced back to the monetary economics literature of the 1950s, does not appear to have been consciously'coined' by any particular individual. Arguably, transaction cost reasoning became most known through Oliver E. Williamson's Transaction Cost Economics. Today, transaction cost economics is used to explain a number of different behaviours; this involves considering as "transactions" not only the obvious cases of buying and selling, but day-to-day emotional interactions, informal gift exchanges, etc. Oliver E. Williamson, one of the most cited social scientist at the turn of the century, was awarded the 2009 Nobel Memorial Prize in Economics.
According to Williamson, the determinants of transaction costs are frequency, uncertainty, limited rationality, opportunistic behavior. At least two definitions of the phrase "transaction cost" are used in literature. Transaction costs have been broadly defined by Steven N. S. Cheung as any costs that are n