The DJIA can be used in three principal ways: as a yardstick, as a barometer, or as an investment.
When the DJIA is used as a yardstick, the goal is to measure performance from one period of time to another:
The most common use of an index by investors is to evaluate the performance of their own portfolios on a monthly or quarterly basis. This is the "benchmark" function of an index, and it constitutes the bogey that many investors try to beat with individual stock picks or with mutual funds. There is no official benchmark for the stock market. Each investor chooses his or her own. The only logical requirement is that the benchmark chosen should represent the part of the stock market that is targeted by the investor's portfolio. For example, if the investor dabbles in large stocks from a variety of industries, the Dow Jones Industrial Average might make a suitable benchmark. But if holdings in that portfolio also include some railroad stocks, say, and utilities, the more appropriate benchmark might be the Dow Jones Composite Average, which includes all stocks in the Industrial, Transportation and Utility Averages. (Dow Jones and Company, 2009).
When used as a barometer, the DJIA is used to attempt to predict where the market is headed:
What will happen next? That's the single important question in the stock market, and there never is an always-reliable answer -- just as there isn't with the weather. But that doesn't stop people from making predictions. Like barometers measuring rising or falling air pressure, indexes can be used to help form judgments about the direction in which the market is heading, and whether it is moving tentatively or certainly. There are a host of technical and fundamental analytic techniques for this purpose, with indexes playing a major role in many of them. And because the market looms so large in the U.S. economy, some people extrapolate market behavior into indications of general economic vigor and health. One rule of thumb is that the stock market "anticipates" major trends in the economy by about six to nine months. But in the real word, such precise timing doesn't always hold true. (Dow Jones and Company, 2009).
The final use of the DJIA is an actual investment:
Indexed investing is increasingly popular these days. It is simpler than ferreting out money managers that can beat the market more or less consistently. It is cheaper than "active" portfolio management, which requires a lot of research, because index investors simply buy the stocks in a particular index. It is less nerve-racking than active investment for a lot of people because indexed investors never lose more than "the market," represented by the index. Of course, they never make more than the market, either, but anxiety-averse investors consider that drawback a fair tradeoff for untroubled sleep. (Dow Jones and Company, 2009).
6. Explain what direct costs buyers or sellers of the securities you have identified above (in question 3) would incur in their buying or selling of these securities.
The direct costs that buyers or sellers of the identified securities would incur in buying or selling are difficult to assess, because there are multiple formats for trading stocks. According to E*Trade, a popular online independent stock-trading website that allows buyers and sellers to purchase NYSE listed stocks without using a broker, the cost for stock and options trades would range from $7.99 per trade to $12.99 per trade, with the price declining as the number of trades increased. (2009). In addition to the fee for the trade, the buyer would obviously have to spend the cost of the trade. Customers utilizing traditional brokerage firms would probably pay a higher cost, because they would have to pay brokerage fees.
7. Briefly explain three (3) regulations that are imposed upon companies by the stock exchange in which those companies are listed.
The NYSE imposes multiple regulations on companies listed on the stock exchange. First, the NYSE ensures that a company complies with listing requirements. Financial compliance involves reviewing:
a company's reported financial results both at the time of joining the Exchange and throughout its listing to ensure that it meets original-listing and continued-listing requirements. Criteria include earnings, cash flow, numerical standards relating to distribution of a company's shares, trading volume, market value and share price, as well as other criteria. When a company falls below any criterion, the Exchange notifies the company and reviews the appropriateness of continued listing. Once notified, in many cases a company has the opportunity to submit a plan to return to compliance...
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